Economic Risks and Trends Affecting Company Bottom Lines

Danielle DiMartino Booth warns that companies face significant risks from rising bankruptcy rates and inflationary pressures.

### Economic Insights with Danielle DiMartino Booth
* 💰  Companies are facing increasing bankruptcy risks, with a high rate of Chapter 11 filings **comparable to the worst days of the pandemic**.
* 📈  Inflation is being driven by various factors beyond the Fed's control, such as **supply chain disruptions** and **idiosyncratic events**.
* 🏦  The Fed may lower rates if there is **unexpected weakness in the job market**, regardless of political pressures.
* 🛠️  Layoffs are broadening across different sectors, indicating a shift from **pandemic-related adjustments** to a more **typical recession pattern**.
* 📉  While a recession has not been officially declared, economic indicators suggest **one may have started in October 2023**.
* 🤖  AI is transforming business operations, with **short-term impacts likely to focus on cost-cutting measures**.
* 💹  Cryptocurrencies reflect market sentiment and risk appetite, influencing **stock market performance**.
* 🌐  The future of globalization depends on **individual country leadership** and potential shifts towards **protectionism**.
* 🌍  Geopolitical conflicts can impact companies' bottom lines, both **directly in affected regions** and through **broader economic and social consequences**.

We've been speaking with top economists to better understand what this economic climate means for companies' bottom lines. Today, I'm speaking with Danielle DiMartino Booth. She's the CEO and founder of QI Research, a global thought leader, and a former member of the Federal Reserve Bank of Dallas. Thanks so much for joining us. It's great to be here today. Thank you for having me again. So, what's the biggest risk to a company's bottom line right now? I think it's how the bankruptcy cycle is gaining momentum. I'm not focused on my bottom line as much as I am on my top line, and right now, it's revenue's cash flow that really are the most at risk. You can't play a lot of accounting games with things like, These are my sales. This is how much cash flow the company's throwing off. This is our ability because of that cash flow to service our debt. This is just really black and white area right now in the C-suites.

So that's why they have to be even more cognizant of the bottom line. What I'm hearing is like, it's really about the money coming in, how much money is coming out, and keeping that book balanced. And that's the biggest risk is like, can you keep that book balanced or not? Yeah, that that is where we are, the run rate that we're seeing, um, early summer, in terms of large companies, we say large, we mean liabilities of 50 million or more. But the run rate that we're seeing of chapter 11, if not chapter seven liquidation, bankruptcy filings, uh, really is on par with the worst, darkest days that we saw of the pandemic. What's keeping inflation so high? Is this higher for longer strategy coming from the fed? Is that working. The Fed right now is in a really tight position when it comes to making monetary policy for the public good.

You know, there were increased costs in the health care system that were caused because of the pandemic. Um, there was a shortage of semiconductors that caused new car prices and used car prices to rise off, well off of their trend after the pandemic hit. It is now more expensive to insure those cars. These are what we call idiosyncrasies. They're one-off events that raise inflation, but over which the Federal Reserve has no control. It's the decision of regulatory bodies. So I think what you're saying is, like all these inflationary pressures, like the interest rates is just it's just one piece of the puzzle. It shouldn't be like, it's not the Fed's fault that inflation is high. So that might be too broad of a statement. At the very peak of the post-pandemic stimulus, the part that the fed was involved with, you know, the fed owned, I want to say, 38% of the mortgage

backed securities market. So the Fed policy definitely had a hand in the run-up to these prices. But again, now we're watching the other side of that, that there's such a long lag time, 12, 18 months between what we're seeing now, which is we're seeing the beginnings of home price declines in certain markets. And we're seeing apartment supply coming online at the fastest pace in a half-century. We're seeing that level of supply start to manifest as falling rents, but it's going to take a long time before you see that come through the consumer price index. But the Fed will probably still get the blame all along the way. But again, you know, when I was at the Fed for almost a decade, they would always say that interest rate policy is a blunt instrument. Do you see the Fed lowering rates anytime soon? Do you think the election is changing their opinion? We have to take Federal Reserve officials at their word, at least to the extent that

it pertains to unexpected weakness in the job market. It doesn't matter how close to or far away from Election Day we happen to be. If it's appropriate, if there is unexpected weakening in the job market, I do think that the Fed will move, uh, and will not hesitate to move just because it's an election year. I think Powell's been pretty clear about that, but that the pressure politically, this is the most active Fed chair in the history of the institution. That's a matter of public record. He has been up to the hill and spoken to more individuals, uh, representatives in Congress and the House of Representatives in the US Senate than any of his predecessors. So he will definitely be feeling pressure coming from by way of their constituencies and the relationships that he's built up over the past 5 or 6 years on the Hill to be attentive to the weakening in the job market.

And I think he'll be listening for that. Do you think there will be more layoffs in other sectors to come? And what industries do you think are the most at risk? We are indeed seeing a fanning out, a broadening of the pain in the job market. And this is where we get into the I overhired into the pandemic, and therefore I shrunk back to a regular sized into chapter two, which is your plain vanilla recession. And that's where we are right now. This is when your job losses begin at the lowest rungs in terms of skills, educational attainment, income-making capacity. And this is why Federal Reserve officials do need to be so in tune to what's happening right now. If this is anything like what we saw in 2007, 2008, it was one-tenth of a move up in the unemployment rate. It's kind of where we are right now.

And then we turned a corner in early 2008. All of a sudden then it was 3/10 and 4/10 of a percentage move higher in the unemployment rate in any given month. And that's what happens when recession sets in. So then with all that said, are we actually in a recession? I know we haven't declared one, but would you say we're in a recession or are we nailing that soft landing? Nobody's talking about that soft landing anymore. Has that gone away? I think the soft landing chatter has, has dried up with, with good reason. We get quarterly, uh, revisions with a very long lag time. The most recent that we got showed that rather than 640,000 jobs being created in 2023, third quarter, that there were, in fact, 192,000 jobs destroyed. But it does indeed look like we're in a situation similar to that where we'll see probably October

be backdated by the National Bureau of Economic Research. Their business cycle dating committee took exactly 366 days to date the recession that began in December of 2007. So, because of all the noise introduced in the post-pandemic environment, it could easily take them a solid year again to be able to backdate the recession. But from all the evidence that we've seen, it does look like the recession began in October of 2023. Will AI transform the way that companies do business? And what does that mean for workers, and what does that mean for employers? Well, I think AI already has transformed the way that business is conducted in America, especially when companies are dealing with recession. They're going to look to whatever the latest technology happens to be to help them really, uh, protect their profit margins. There's going to be a much happier ending to AI. It's going to revolutionize the efficiency of health care.

But I would say in the nearest term, call it the next 6 to 18 months, AI is going to be where it's at least going to feel like a weapon of mass destruction because it's going to be wielded for the purpose of cutting costs. What impact do you see cryptocurrencies having on the broader stock market? So to me, cryptocurrencies are the best reflection, the best reflection of what I learned all those years at the Fed are called animal spirits. So to the extent that the cryptocurrency market is behaving well, that you're going to see buoyancy in the stock market, I really do think it's that simple. I'm a superficial economic, financial market historian. Every single time the Federal Reserve has cut interest rates, the stock market has finally turned tail. And that's always how it's worked. There's been no exceptions to that rule. So I don't think cryptocurrency is a reflection or a matter of inflation or deflation.

I think it is a reflection of people having continued risk appetites because everything in their portfolio is doing nicely. What's the future of globalization, and is it declining? It depends on who the allies are of any given country. You have a coming of age in Mexico to our border and a higher educational attainment and a higher homeownership rate just south of our border. Maybe we made a mistake by becoming so deeply embedded economically with China. But we know how globalization can work to help us be more efficient and thereby build out our allied networks, possibly between Canada, the United States, and Mexico, as it's always been envisioned. But of course, if there are far-right contingencies in any given country that want to put up trade barriers, it's not going to matter what and who your political allies are. It really is going to come down to the leadership of individual countries. The fear, of course, with one far-right-wing government after another being

elected, that it's going to be a potential wave of isolationism and protectionism and nationalism. And that means that we could, in the longer term, see inflation be higher than it otherwise would be. How does the ongoing war in Israel, and also the one in Ukraine, how do you see those impacting companies' bottom lines? It's a very company-specific question, and whether or not you sell into those markets. We have seen that social strife and divisiveness has its economic price. None of this is free, and a divided America will fall. And make no mistake about that. So I think that we have to be cognizant of the price that we will pay if we decide to be an isolationist nation. When it comes to our allies, we have to always bear in mind what made our nation great to begin with. We didn't pick and choose back then. It was liberty.

Give me liberty or die. So I'll get off my soapbox. But I think we should be cognizant not just of direct companies selling into war-torn lands, but also how the war and other areas of the world affect the social standing, the social fabric of the United States, because there's a very real economic element to that.

America Is In A 'Plain Vanilla Recession': Danielle DiMartino Booth | The Bottom Line

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The Current Economic Climate and Its Impact on Companies

Danielle DiMartino Booth, CEO of QI Research and former Federal Reserve member, highlights the growing risk of bankruptcy for companies, with a focus on revenue and cash flow.

The current run rate of Chapter 11 and Chapter 7 bankruptcy filings for large companies is on par with the darkest days of the pandemic.

Inflation remains high due to various one-off events, such as healthcare costs and semiconductor shortages, which are beyond the Federal Reserve's control.

The Impact of Federal Reserve Policy on Housing and Jobs

The Federal Reserve's policy has contributed to the rise in home prices, but there is now a lag time leading to declining prices and falling rents.

The Fed's response to unexpected weakness in the job market may lead to rate changes, regardless of the election year.

Job losses are broadening across sectors, with the lowest-skilled positions being the most affected, raising concerns about a potential recession.

The Current Economic Situation and the Impact of AI

The unemployment rate has seen significant increases since early 2008, raising questions about the current state of the economy and the possibility of a recession.

Recent job creation figures have been revised downward, indicating that job losses may have occurred instead.

AI is already transforming business operations, particularly during economic downturns, and is expected to revolutionize efficiency in healthcare.

The Impact of AI and Cryptocurrencies on the Economy

AI is expected to be a powerful cost-cutting tool in the next 6 to 18 months, potentially causing disruption.

Cryptocurrencies reflect investor risk appetites and have a direct influence on the stock market's performance.

The future of globalization is uncertain, depending on political leadership and the establishment of economic alliances.

The potential rise of isolationism and nationalism may lead to higher inflation in the long term.

Ongoing wars in Israel and Ukraine have a company-specific impact, with social strife and divisiveness carrying an economic price.

A divided America could have serious consequences, emphasizing the importance of maintaining strong relationships with allies and recognizing the economic effects of global conflicts on the U.