TDI Podcast: DiMartino Booth Says What?(#944)

29:25So for us. I'm sorry. I'm sorry. I'm speaking about Empire. I have my surveys messed up. I was wondering what was going on there. I was a little confused. My apologies. I'm sorry. Let's wind that back and start all over again. It's okay. We don't do edits. So tell me about, I'll give you some high-level things and you can discuss it, right? Philly Fed, current prices dipped three points to 35.8 in October. They're only three months between 2011 and 2019 that came in that high, though. So pricing pressures, what does that mean for labor? What does that mean for employment, et cetera? What that means for labor, first and foremost, is that there's going to be less of it.

30:06And in the sense that O 'Reilly Auto Parts, for example, today came out and said, we're not able to get people to pay higher prices. And therefore, we're seeing a decrease in our sales. Um, the biggest problem with higher prices is that companies cannot control for them. They must pay them. And if they cannot pass them along to the end users, then they end up having to control the only cost that they can control. And that is labor. And that's why we're seeing continued layoffs and increasing numbers of cutbacks that we're seeing. And you know what? It really has picked up here just in the last two weeks or so, I would say.

30:51What's interesting is that even though, and some economic numbers we can't get right now because of the COCTA shutdown. But aside from that, I mean, who knows? We have an 8 % unemployment rate right now. We don't know. We don't know. Obviously, they're kidding around. That's not going to be that. But when it comes to the orders, clearly the new orders and inventory spread in the Phillies non-manufacturing survey fell dramatically. Dramatically. I mean, like historically. And that is a real cause for concern. It tells you that demand has crumbled in a very short period of time, and then you joke a little bit less about whether or not the unemployment rate could be appreciably higher than what we think that it is right now.

31:44So with that and the fact that the controlling costs can be things like employment or margin compression, I don't care how you want to look at it. They could do it a few different ways. They can not hire, not give raises, increase prices. But if increasing prices doesn't work, then they can take it on the chin if they don't want to fire people. You know, we don't know where they think the – how long this is going to be, if it's temporary, if it's a long period of time. But the bottom line is when we're seeing that these new orders for inventory and inventory spread, is that possibly also because there's a lot of pull forward and this is the impact on the back end?

32:20because some of the things that everybody knew were that with all these tariffs going in, they'd have to front run this whole thing. And that somewhere in about April or May, supposedly, maybe even June, was supposed to be that cutoff time when, okay, everything that was shipped was shipped, everything that's coming in, no tariffs on these, then the tariffs start, let's get this going. Is that possibly or are we way past that? No, I don't think we're past it at all. In fact, if you look at other countries like Germany who have seen their order books get just annihilated, that is indeed the it's the hangover effect, if you will, from all of the from all of the stock building that was done in anticipation of the tariffs.

33:03And now the demand's not coming through on the back end. So you're seeing order books just decline incredibly, whether or not you're talking about the Philadelphia region and the services sector or the country of Germany that is the world's third largest exporting nation. Behind NVIDIA. Right? That was good. That was actually very clever. So let's just kind of go through this one more time just to be clear about this. So there is a hangover effect, which turns into, let's call it a collapse. But that doesn't necessarily mean, let's think of the bright side for a second, that the collapse will continue because they could pick it up on the other side unless demand just totally is gone.

33:51Right? Because if we have the same demand that was continuing, they may not need to have the orders. Sales to inventory, sales to spreads wouldn't be what it is. But the question is going to be like two months down the road, right? Do all of a sudden things normalize? I think that that is certainly the hope right now. And that's why there is so much uncertainty out there. And people are paying as close of attention as they are to things like declining credit card usage. the weekly data that comes out from Bank of America on their customers' use of debit and credit cards, that is weakening as well.

34:33So we're all kind of holding our breath right now saying, are we going to be able to hit the refresh button once this stock building is burned through? And are we going to have a normalization on the other side of that? Or is the U.S. recession going to continue? So U.S. recession continue. Wait, wait, wait, let's back it up for a second. Reel that back. That was quick. What were U.S. recession that we were not made aware of by email or by true social post? Well, that would be the one where after a very short period of time, we learned that we had a net job destruction, net job losses, according to the Bureau of Labor Statistics, which usually takes years to provide us with these revisions.

35:16And yet we found out in two short months that we lost jobs in the month of June. And there's no reason, given what we've heard from individual states and adding them up subsequently from their departments of labor, which are not shut down right now, by the way, that June actually looks to have been even deeper in the red, a loss most likely of around 65 ,000 jobs. If we were already losing jobs before the shutdown and revisions to prior years tell us that net job destruction was also in place in the second quarter of 2024. The question we must ask right now is what's going to get us out of recession?

35:58Well, it's not going to be the relationship we have with other countries. You know, these great relationships supposedly that we have, you know, in Canada, talk about a an absolute collapse. The numbers that came out last week on the alcohol orders from various, you know, like our bourbons or beers or whatever we have here, right? They are not stocking those on their shelves. Not only that, if you look, I mean, it's like an 80 % decline in alcohol sales to Canada from the US. That's - To say nothing of the fact that they're not coming here anymore to the United States to visit. Right. And that is its own real nasty set of circumstance because we have relied so heavily because Canada is a huge ally on Canadian tourism.

36:46Yeah, and I live in Florida, so Hollywood has been, you know, we used to make fun of all the Canadian drivers, by the way. But what's interesting is this is something that for many would be like, well, who needs them? You know, well, we don't want the Asians. Asians aren't coming here. They're not, you know, here and there. But first of all, you know, even though the dollar has come down in value, it's still high comparatively for where it's been. That's where all the travel, I mean, everybody that I've seen, the big travel is like going to Asia. It's going to Europe. They're not coming here as much.

37:20And a lot of people have said, you know, who needs them? We need them. I mean, there's some weird thing that's going on that there's this belief that somehow we are not, we can stand alone. The reason we are so strong is because of the relationships that we've had over the years and the globalization trend that we've had that we have, if all other countries considered, every country in the world, we have made out like bandits from offshoring. Now, we've built up other countries like Vietnam and Indonesia and, you know, even to a degree, initially Singapore, but they have their own thing going on there.

37:55And Korea. India has been a huge beneficiary. Huge beneficiary. But also every bit of the beneficiary that we give them, there's a lot we get back. Of course, that's called goodwill. And that's why and that has benefited our hotels, our airlines, our tourism centric states and cities. And yet we hear one month after another that we're not seeing traffic pickup at all in the most tourism centric city in the country, which is Las Vegas. Right. I heard Las Vegas is awful. I was just there. It is like a ghost town. Wow. Well, the prices haven't helped either. Everything is so... I've gotten reports from a few of my friends that go to...

38:41They go to the mandatory two conferences they go to each and every year in Las Vegas, for example. The prices are absurd in Vegas. And the old Vegas... It's$35.69 for two beers at the pool a few weeks ago. $35.69. Yep. Because they charge you all kinds... It's like buying a car between title, license, and gratuities and everything included. I mean, I was like, did I break a window? It was just a beer. Yeah. It's a problem. And it is getting to the point, as you discussed in your first start out, with the O 'Reilly discussion where people are saying, you know, I can't spend anymore. I just can't do it.

39:17As a matter of fact, so I went to the store the other day, the local grocery store. and I usually get the, I stock up on some waters and some things that, you know, for the, for the office. And this day, I don't know why I was in there. I'm like, you know, Hey, let me call the office, see what they need. So I call it, you bring some Diet Cokes in. I'm like, okay. So I go over down to the Diet Coke aisle, which I get the cans. It was like$10 and 79 cents for a, was a 12 pack. And I'm like, what? I thought there used to be a 25 cents each. So that's a, That's a, what is that? A 250%, 300 % increase in price.

40:00And usually I would buy a bunch of these things. If I was asked to buy these, I'd buy three or four of them. I'm like, you know what? I'm buying one pack. We'll go through them slowly until we can find one of those BOGO deals or whatever it is. This is not happening. So not that everybody, I'm the one that likes to diet Coke in the office, by the way. So it's not like I'm saying to my staff or anybody, hey, forget it. Forget coffee. Forget diet. Bring it around. That's not what's happening. Point is, though, that I drew the line. I drew the line recently. I was having a party and I called up somebody and said, listen, can you get me Alaskan?

40:31This is a little bit higher end issue. Can you get me Alaskan King Crab Lakes? Because I got some like six months ago. And six months ago, they were expensive at$40 a pound for the big, big ones, the really, really big ones. Yeah, let me check. Come back,$75 a pound. I'm like, wait, wait, wait. Just a few months ago, they were$40 a pound. I'm not paying$75 a pound. Not happening. Again, drawing the line. And I think people have finally, even for things that may be semi necessities, whatever we call them, staples, I guess we can call them, right? They're backing off. Yep. And that's where things start to be problematic.

41:08Oh, yeah. I mean, listen, I have always been, even before they were electronic, I've always been a coupon cutter since I was a child. and at this point I wait until it is buy two get three free on those 12 packs of Diet Coke and Coke and I stock up when they're on sale and otherwise I do not buy them I will not cross that line this is an interesting situation and you know one of the things we know also is that we've seen a lot less consumption by America and other countries because we've we've had a just like we did the last term, we got to find a bad guy. We got to point a finger. We got to say China's the bad one.

41:47You know, we don't like them for all these different things they do. I found it fascinating the other day that there was a discussion from, I believe, the Secretary of Agriculture. I believe that's who it was. Whoever it was, it was a government official, I believe, was talking about how, oh my God, China is targeting our farmers. They're trying to do damage to our farmers. They're not buying the soybeans. They're not doing this. They're not doing that. This whole discussion about how China is targeting it. I'm thinking to myself, wait, wait, wait, wait, wait. Aren't we targeting them? Aren't we trying to cause economic harm to them in response to something?

42:21You know, that's not brought up in the discussion. Nobody wants to hear about that. That's the fact. These tariffs are causing economic harm to big companies and small companies in China, in Thailand, in wherever else it is. Forget the stock markets. I'm just talking about the actual businesses. We saw that China's base book sales revenue reached a new cycle high in quarter three. but it was this whole inventory surge, right? But yet we saw the things on the other side, like borrowing fell. How do you square that? Yeah, look, if the demand is not there, then you're not going to see any kind of an echo in credit and the demand for credit.

43:01And that's a very real thing. You know, I do find it to be somewhat ironic, ironic. Going back to your comment about farmers who are up in arms. Don't get me wrong. My children go to school in Indiana. I absolutely love farms and farmers. But the first time that we had a trade deal with China, they did not live up to their end of the commitments that they made to buy soybeans, to buy corn in the first place. So this should not be coming as some gigantic shock to the system that China has taken the next step and bought from countries it feels are its economic allies, like Brazil, like Argentina, where they're buying up all of their soybeans.

43:48Wouldn't you do that in business? If there was somebody that was bad-mouthing you on Twitter, would you send them a free subscription? Of course not. Would you? You know, isn't this a way of just—and by the way, we all knew that the framework deal to buy soybeans and sargum gum or whatever that stuff is and whatever all this stuff right was never first had any teeth in it number one number two it didn't have any kind of mechanism to track properly and it third thing just to go back the first one if it wasn't lived up to there was no harm no foul this is all about and this all is about making a deal that's all this is And I wish people could see through this for once.

44:32It's all about just the fact that we got a deal. I made a deal. The fact that we got a deal is more important than the deal. The guts of the deal. That's why nobody knows about any of the deals. We have no idea what most of this stuff is. No, because to your point, there's no accountability. There's no follow through. It's all about what happens right now, making us look good and all that. So what is going to happen with China? Listen, have you been to China, by the way? I have never been to China. It's been suggested that I not go. Oh, why not? Well, when we had the last trade deal signed, it was in the heat of when the global pandemic was breaking out.

45:15And China insisted on having a force majeure clause in the trade agreement with the United States that said that in the event of a global pandemic, for example. something that could not be predicted, then they would not have to live up to their end of the bargain. And lo and behold, very soon after the trade agreement was signed, then we found out that we were in the middle of a global pandemic after all. And I might or might not have said in a public venue, a view that went viral, that putting an act of God clause in a trade agreement with full knowledge that there actually was a pandemic was tantamount to an act of war.

45:59So, no, I am not welcome in China, nor have I ever been. I'd stay away from China's restaurants if I were you, too, by the way, with that. But nonetheless, the thing in China, what I was going to mention, I have driven and I've been through many, many cities in China, and the whole idea of ghost cities are real. I can tell you that. I can tell you that as opposed to just thinking that they were made up. There was miles, probably 50 miles of a run that I took, not a run, a car drive, that I took along this one particular highway and rose deep of housing, apartment complexes, little mini cities built, but nobody lives in for miles.

46:49Miles, you could see it. You knew what exactly was going on because there's no parking lots, no nothing. It was like half built, but built. And that is something that has gone on. The question is, is that what's been going on with this inventory buildup? They're just trying to economically keep things running when, in fact, they're just going to end up putting it into the dumpster on the back end. Well, and that's, you know, you've actually also seen films of these ghost structures being bulldozed and blown up. And the latest data that we have out of China shows that home prices are still falling throughout the country and that residential real estate remains extremely problematic.

47:35Yes, and the banking system is collapsing a lot as well. It's kind of interesting. What do you make of the recent, once again, instantaneous in, instantaneous out banking crisis that we have with regard to auto parts distributors and auto-related companies with the fraud, with the inventory, accounts receivable financing that they pledge to way too many lenders, as in a recreation of the Broadway play and the movie The Producers?

48:14It is interesting that it is specifically the bankers who continue to insist that this is a one-off event and that this is not, this in no way reflects widespread problems that you can get into when you start to finance your suppliers, which we were just talking about. that with housing, weren't we? Yeah, we were. So wait a minute. Let me just get something straight. Are you saying that if there was a situation that was much more problematic and it was much more, what's the word I'm looking for? Widespread. Widespread. That the banks would come out and they would say that, yeah, look, we have a big problem?

49:04Well, no, I'm not that naive. I was wondering what you're saying there. So you're saying - So far, for those of us keeping count, there are 10 banks, 10, count them on two hands, 10 banks that have been brought into this first brands or tricolor mess where they've had major levels of charge-offs. So if nothing else, we can't, and we just had another subprime lender go belly up, by the way, called Primalend, we can certainly say that at least the practice among lenders was more widespread and more problematic than what we had thought it was. And look, this is part of life. If you want to find out where there is smoke, there's fire, so to speak, you find out where things have begun and the epicenter of them, and then you just fan it on out.

50:01And that's exactly what happened with Off Balance Sheet Financing and Enron and World Comp. We've seen these movies before, and we know how they end. Those were concerted efforts by the company of an internal management situation that they wouldn't release. What's fascinating about this is the poor and sloppy lending standards that went on for some of these banks, especially when you have multiple lenders. It's funny because they came back, a few of them said, you know what, by the way, just to be clear, I think this was, what was the big one? What was the big one? Who was the bank that got hit?

50:36Was it Jeffries got hit? Jeffries got hit very hard. What was the other bank? What was the other? Fifth third. Yeah, there's another one that was the second time. JP Morgan Chase got hit. There's another regional. Anyway, that regional goes and they said, we did a check of our books and we confirmed only one, you know, we confirmed and we went out and we did the research. And we see that, yes, we're good now because only one account receivable pledge per account receivable. I'm thinking to myself, wait, wait, wait, wait, wait, wait. Hold on a second here. That comes back within a week. You go and do all the research within a week.

51:15Does that mean that you did not do any of this on the front end of of loaning this money out? Well, the answer clearly is they didn't. Right. Or they're lying now. I don't know. Maybe both. That gets you back to the whole idea of sloppy underwriting and the left hand not knowing what the right hand is doing. And by the way, it extends all the way to the Federal Reserve because the Federal Reserve itself had to reclassify commercial and industrial and consumer loans into this other bucket, non-depository financial institutions, which is basically lending into the shadows, to the tune of$300 billion that they didn't know were loans that were misclassified on bank balance sheets.

52:01So we're in trouble if the regulators also don't know what's going on. No, that's par for the course. That's par for the course. The regulators never know what's going on, in my opinion. I mean, seriously. Well, if it's meant to be hidden or footnoted, you know, they're just not, there's too much. And the fact is there's too much money floating around. By the way, most of it created by government and then created, you know, this is, I talked, I started the show off talking about how where are the discussion of where are we? Where are we right now? The idea that where we are right now is not much different than we were post 2009, post 2020, where somewhere along the line, there was a drop in interest rates.

52:43There was more stimulus given that we had some big bill that was dropping money, even though, you know, the Inflation Reduction Act by Biden and the big, beautiful bill by Trump, both of those were stimulative in a big way. That creates a massive amount of money into the system, which then therefore is throwaway money where people just speculate like all hell on either meme stocks or leverage. There's more margin in the system right now. We've got the reports from various players. They are the most margin they've ever had from some of the major players out there in terms of the brokerage margin.

53:20Oh, gosh. Margin debt, even as a percentage of GDP, has never been higher than what it is right now. And that does not include, by the way, the three times levered ETFs that you can buy just to bet on one stock, but with triple the exposure. Right. All of that leverage is not included in what we're seeing with margin being at record highs. And when margin is at record highs like this and confidence is up like this, it's always a shaky situation because the cascading effect of the downstroke is a problem. If, in fact, there is something that is real, not a one-day wonder like we've seen, not one day that Trump is not having a meeting and now he is having a meeting and not one day that the Fed is going to keep it solid, now he's going to decrease or whatever party is pulling the plugs here.

54:06But a lot of this also is based on government being involved. Now, you know, we've talked about and discussed, especially with the Treasury Secretary, he's been just talking about doing a sovereign wealth fund. Well, instead of doing a sovereign wealth fund, I have a better idea. Let's just give money to Intel. We'll get the deal at a discount. We'll own a piece of it. Let's give money to MP Materials. You know what? How about we give money to now quantum computing companies in return for a grant? I mean, it's almost in a weird way better. We got a big piece of the company. We get it at a huge discount.

54:42Forget the sovereign wealth fund route. Who needs that? We'll just dangle some grants out there with taxpayer money, which, by the way, I don't even know where they got the authority to do so. You know, one day we weren't involved in the capital markets. Now we are wholeheartedly. Yes, and that does not sound like capitalism to me at all. We were arguing for years that there was an unfair advantage by these other countries because they have what's called state-owned enterprises, SOEs. And I'm like, that's a terrible thing. Oh, my God. Can you imagine? We can't. We need to put a sock in it, boys.

55:17Never in the United States. And then here they're going to buy a chunk of intel. Right. It's absurd. It's just totally absurd. and everybody makes it think like there's nothing wrong with this. Well, you know what? They're doing it. We're going to do it too. Wait a second. It wasn't good to begin with. That doesn't give us the green light to do this. Danielle, it's so frustrating. It is. I mean, our parents always said that's not an excuse. But such and such as parents are allowing them to, you're like, okay, you're still going to fall off the roof and break major limbs. That doesn't make it okay.

55:52Danielle DiMartino Booth:Yeah. Crazy what's going on. Tell me a little bit about what the things you've been doing over at, uh, at your company and tell people where they can get over and find Quill intelligence. We'll have this over on the show notes for episode number nine, nine 44, but, but tell me. I, you know, should I, I, I'm, I'm hereby placing my request to be episode number 1000. First of all. Oh, we could do that. Well, yeah, we could do that. Look at you almost a thousand. In any event. Uh, yes, please come to demartinobooth.substack.com. We have a very loyal following with our Daily Feather readers. We publish every single trading day of the year, whether the government is shut down or not.

56:31We were always looking at alternative data sets. And thank heavens for that, because we didn't have to play as much catch up as some other research houses have. But anyways, yes, demartinobooth.substack.com. If you run institutional money, come to QI Research. I would love to personally talk to you about that. And if you don't already follow me on what used to be known as Twitter, please do so. At Demartino Booth. Formerly known as Twitter. Well, thank you so much. As always, a very insightful and a very, you know what? I don't know what it is, but I always, I always, my, my, it's, you bring good stuff out.

57:11And I find it to be a little bit of rebel rousing that we do here, but also some real truth and some facts. So I appreciate that. Anytime. All right. I'll talk to you soon. Thanks. Take care. And that's going to wrap it up for this episode of the Disciplined Investor Podcast. Next week, we're coming up right before Thanksgiving. Right before Halloween, Vitaly Katzenelson. And then we have Manuel Blay. Ross Gerber's coming back. Tim Knight in mid-November. And then a whole bunch of guests. As a matter of fact, trying to button up a couple of people. But we have some wonderful guests coming on. and a bonus episode in the next couple of weeks as well, talking about some ESG and a few things that we're going to tack on to the back of one of our other shows coming up.

57:58Listen to DHM Plug, go over to the Disciplined Investor, and let's just get it going. Thanks for being there. Thanks for your support. And hope to see you next week. We're going to have a good time with it. See you soon.

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