A Foreclosure Wave Is Coming | Chris Whalen on FHA Mortgage Loans, Tariffs, Bank Valuations, and Payment Companies
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this f***ing door.

Today's episode is brought to you by 2Creum. Learn more about how agricultural commodities can play a role in your portfolio by clicking the link in the description. I am joined once again by Chris Whalen, banker, author, citizen of Whalen Global Advisors and publisher of the second edition of Inflated: Money, Debt, and the American Dream. Chris, great to see you again. Welcome back to Monetary Matters. What is your outlook on the

the Trump economy when it comes to tariffs, when it comes to Doge. What's your economic outlook? How is President Trump going to be influencing that and how does it influence your market views? Well, as you heard from the Fed yesterday, everybody is dropping their GDP estimates for this year, mostly because they're worried about tariffs. I think Donald Trump is probably going to be as disruptive for the US economy in the 21st century as Andrew Jackson was in the 19th century.

You know, he essentially forced the U.S. economy onto a gold only basis in order to pay taxes, tariffs, buy land. You had to pay gold.

He also got rid of the central bank. So by definition, the year, you know, 20 years before the Civil War was very, very deflationary. And I think Trump is going to have a deflationary impact as well. Even though he is talking the gospel of conservative pro-growth economics, his own personal tendencies are very conservative.

Almost 19th century. And many of the conservative think tanks in Washington who are supporting the Trump administration essentially want to wind the clock back 50 years, go back to the pre or maybe post World War II period.

and really dismantle a lot of the New Deal, a lot of the Great Society. The Republicans have been waiting for this for decades, so they're going to take the opportunity now. So cutting the Great Society, Social Security, Medicare, and Medicaid, that to me, I think President Trump has explicitly said that he will not do that. No, no, they're not going to go after Social Security or Medicare. That's different. What I'm saying is they're going to go after the entire system

apparatus of government that has grown to support the private sector. So housing. Housing is the most subsidized part of the US economy. In most nations around the world, if you buy a house, you pay cash.

They don't have credit for housing. The US has used credit to boost housing, used that to boost growth. Really since World War II, we went from the military industrial complex to the housing complex. That includes the realtors and the home builders and everything else. You look around the country today, Jack, what do you see? You see a lot of spec homes above the average price, well above half a million dollars that aren't selling.

We built too many of them. So we do, you know, use credit to goose housing. And Trump is dismantling this. In fact, this morning, when I got in front of my computer, I found out that a number of my friends at the regulator for Fannie Mae and Freddie Mac were laid off last night. And you're going to see headcount reductions at Fannie Mae and Freddie Mac probably this week.

Chris, you know housing and in particular mortgages, mortgage-backed securities and the government's role in that better than probably any of my guests and better than probably anyone on TV. Why is that a good thing? The FHFA that regulates Fannie Mae and Freddie Mac and also the Federal Home Loan Bank, FHLB, why is it a good thing that –

You're right. The US in Europe and Australia, they're not really 30 year mortgages because of the duration risk and the convexity risk, not to mention the credit risk. So the US, because we have a government encouraged policy of Fannie Mae and wrapping these into mortgage backed securities, which now is taken over by the government in 2008.

So why is that a, to me, that seems like a good thing, you know, that you can get a mortgage that is just barely above the 10-year treasury. And that really encourages, you know, homeownership and empowers the middle class. Why is that a bad thing? And why is it a good thing that President Trump and his team is trying to dismantle that? Well, look, I'm all in favor of reform because I think, unfortunately, the subsidies we apply to housing cause home prices to go up a lot.

When you combine now with the Fed and what they did during COVID, it drove up housing costs enormously so that it's now a political issue. I think what a lot of conservatives would like to see is for the government to get out of everything except that first time homebuyer.

So whether we're talking about the FHA, which really caters to lower income borrowers, or the middle class, which deal with Fannie Mae and Freddie Mac, they want to get these agencies out of multifamily lending. They want to get them out of second homes. They want to get them out of refinance mortgages. And essentially that business would go back to the banks.

The problem is, is that there's a gap of, you know, three, $400,000 between the median price today, which is around $400,000 for a home down to the FHA market, because the banks love big loans. They love loans from affluent Americans, right? Because they have a very low probability of default.

But when you're talking about mortgages that are below the average size, like I say, around $400,000, banks don't want to touch that. That's a government market today. So while from a policy perspective, you may want to shrink the role of government in housing, you've got to be careful how you do it.

Because if you do it too quickly, you're going to cause problems. And you're going to see this, by the way, in multifamily housing in urban areas, which are mostly we're talking about blue cities, right? So Trump is going to just dump them. They're going to get out of all multifamily financing at HUD. Well, who are these people? These are buildings that can't be financed with banks.

So you got to be careful what you wish for. And you also have to be very deliberate and very careful in how you implement reform. Because if you cause a problem in the markets, you know, it's going to be bad politically. So that's kind of how I look at it.

I worked for Jack Kemp. So, you know, I'm a supply side or all day long. I do think, you know, having been through four years of Joe Biden and then also remembering the destruction and the mess that was caused during Barack Obama. Housing is a problem right now, Jack. There's a lot of bits and pieces out there that could cause the Trump people a lot of political issues because it's such a mess.

The Biden people really caused an enormous problem in housing and then they left office. So the Trump people now own the problem. - Chris, to my untrained eyes, the problem in American housing is the exact opposite of the problem in housing we had in 2008. In 2008, people had loans that they couldn't afford. The prices went down. Now the housing market is quite strong. The prices are very high and it's just no one can afford it and no one can afford rent either. So that is a really bad problem.

How is what President Trump's going to do, how is that going to help that? And also, isn't a big part just improving, getting rid of regulations and getting rid of zoning so you can actually build more housing? Well, Trump is talking about that by opening up federal land for housing development. The zoning issue is a local issue. You've got to fight that really at the state and local level because that's who controls it.

The only way you could really reduce the cost of housing in the near term would be if the Fed had squeezed harder when they were tightening interest rates, but they were afraid to do so. You know, let's face it, you follow this very closely. They barely reduced reserves. So if you're not going to force housing prices down as part of Fed tightening, what are we talking about? Are we really fighting inflation? No.

And the Fed ignores housing costs, as you know, in their definition of inflation. So we're in this funny place where, unlike Paul Volcker or even Greenspan at times, the Fed was afraid to force asset prices down because they're worried about deflation. They're worried about all the debt out there. So, you know, unfortunately, we haven't gotten that drop in housing prices that you normally see after a period of economic disruption like COVID. Instead, they went up.

because they dropped financing rates down to zero. And we refinanced almost every mortgage in the country in two years. That's not normal. And the Fed refuses to talk about it. They never talk about housing during the press conferences. So, you know, there's a big void here politically and I think also in terms of economic policy, because nobody knows what to do about this. So Trump is going to cause disruption

It sounds like long-term you are an advocate for these policies, but short-term disruption is bad for the markets and economy. Is it not? Let's say we wind the clock back, what, 190 years? If you were a strong supporter of President Jackson, you say, I support him politically, but...

know i'm not going to be long stocks or long stocks on leverage in 1836 when he shuts down the second bank in the united states and then he causes the panic of 1837 which i believe is probably the second worst financial crisis in america um maybe the third you know after great depression and 2008 the panic of 1837 was just a horrible horrible recession obviously i don't want to speak like you know like i was there but just from you know what i've read about it like you you think it is a good thing but

Markets don't care. As Jay Powell said yesterday, basically a job is a job. As an economist, if you look at a job, are you unemployed or are you not employed? How much money do you make? It doesn't care if you work at some government agency that half the country's conservatives think is a bad thing. Leave that out of it. A job is a job and that's what matters to the economy.

Are you bearish on credit and stocks? And if not, why? I am bearish on credit because I think a lot of what we see in private equity and also the street desperately trying to sell credit strategies to retail investors, it's not a good sign. The illiquidity that we see in private equity today and the ways that the managers are

out there borrowing money so they can continue the pretense of many of these valuations is going to come home the roost. It may come home this year. But I think more importantly, if I drop my GDP estimate, you know, I'm Jay Powell, right? And I come out and I tell everybody that the level of uncertainty is such that I'm not dropping rates.

And on the other hand, I'm reducing my estimates for the year. Well, everybody on Wall Street who uses that GDP estimate to factor into revenue and earnings projections is also going to have to adjust down.

So my sense is that the beginning of the first quarter was pretty good. The end of the year was pretty good. I'm writing a bank note right now. I think by the time we get to the end of March and really take stock of what we've got in earnings, you're going to see a fairly light March. And some of the broker dealers, the Goldman's, the rest of them, they're going to do okay because there's been a lot going on in the markets.

But for banks, you know, when Powell said that they're finally going to slow the reduction of the balance sheet, well, that means that bank deposits are finally going to start growing.

The big beneficiary of the past six, 12 months has been money market funds. They've been growing like a house of fire because when the Fed is shrinking their balance sheet, that basically means bank deposits are also going to shrink. When the Treasury is in deficit, when they repay a bond, it's held by the Fed. They have to go out and refinance that piece of paper immediately. So an investor buys it since the Fed's not right. And a bank deposit disappears.

That's the mechanics of quantitative easing and quantitative tightening, unfortunately. And it all comes back to the Treasury. The Treasury is what's important here. Yeah, I think the TGA drawdown and the debt ceiling thing is why the Federal Reserve first started to talk about tapering quantitative tightening in the minutes for the January meeting. And they actually did it this time. So the Treasury roll off is now $5 billion.

cap instead of $25 billion. So that will have impact on the banking system and the financial system. Right. If you use reverse repurchase agreements as your benchmark of the Fed doing too much, in other words, they had to go into the market and sop up all that liquidity. What you now have is Trump is trying to throttle back

federal outlays. So that cash balance at the Treasury General Account is going to be higher than expected, right? If those funds aren't flowing out of the Fed back into the economy, well, that means bank deposits aren't going to grow as fast.

There's a whole list of things that aren't going to grow as fast. So this interaction between the Fed and the Treasury is very important. I'm always astounded when economists kind of dismiss the balance sheet part of the press conference and focus on the target for Fed funds, because that's what they understand or they think they understand. The balance sheet is also very important.

Right. I mean, 98% of the conversation is about the economy and interest rate policy. Only 2% is about the balance sheet. And it's normally those reporters at the non-super well-known institutions, not the Wall Street or Financial Times that ask about the balance sheet. Chris, what's your outlook on the banking system in terms of credit, consumer delinquencies, auto delinquencies? We know mortgage delinquencies are low.

Pretty much every other part of consumer credit has been weakening slowly but steadily since 2021. Consumer credit card delinquencies are at the highest they've been since 2011. Auto delinquencies are quite high. And look, now this is not a crisis for banks necessarily because they make money and they're making more money on the credit.

you know, the interest than they are losing in the delinquencies and the write-offs. But what is your outlook? Because if the economy is weakening, for example, let's say President Trump and Elon Musk and Doge let go of 200,000 federal workers. I mean, those are workers who are using the money that they get from the government to pay off their loans. Like, do you think that this could eventually cause a up,

increase in delinquencies. And also, Chris, as you know, banks don't realize the losses on their loans when they stop, you know, when they just lose the money, when they don't get the money in, they reserve for it in advance. So the losses, you know, in early April, we're going to see the banks report their earnings. You could see those losses as early as then, even if the losses haven't really materialized in the actual data. Well, you know, what's interesting about your question is that reserves have been falling.

The loss activity has been relatively modest. So banks have been pulling reserves back into income, including in the fourth quarter. It depends on the bank. But if you watch people like Synchrony, Capital One, Ally, all of the consumer lenders, yes, autos is probably the most serious in terms of elevated default.

Cards, you know, the rate of default, yes, is back to 2011 levels. But the dollar volume of default is relatively low for the banks. Why is that? If the link is so high, why is the dollar volume of defaults low? Because the credit card book has grown by over 100% since 2008. It's much bigger. And the rate of utilization on cards is very low. There's $5 trillion worth of unused credit lines out there.

and they've got a trillion dollars worth of cards. So, you know, oftentimes people write about this and they get hyperventilated about the loss rate. I'm more worried about commercial this year

Consumer is going to be front and center by the end of this year. We may even see this economy slip in a recession simply because we've been putting off so many issues going back to COVID. And we still have probably half a million people who are floating around in various types of forbearance on their mortgages. Trump is going to clean all that out.

There's a lot of backlog left over from the Biden administration that they're going to deal with, and it's not going to be very pleasant. You could see quite a lot of foreclosure activity in the second half of this year. Chris, explain what you mean by that. When you talk about commercial, you mean lending to businesses or commercial companies?

real estate, commercial loans to businesses, multifamily real estate, which is considered commercial. So really the opposite of 2008. If 2008 was a consumer recession and the prices of homes fell dramatically this time around, as you know, last year it was commercial real estate. That was a big pain point.

Now consumers are starting to ripen too. And yes, residential real estate is still very low because of the Fed. They basically made the cost of default go away with the magic of low interest rates, right? But the reality is, is that if you look at the bottom quarter of homeowners in this country, default rates at the FHA are in the mid-teens.

And that's what we should be worried about, because that's your warning. When you see low income families getting shellacked in the FHA market, many of them are going to be, you know, have to go through foreclosure or they'll sell the house and take the net proceeds and go off and rent something. You have to worry about that because down the road, we're going to see

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So Chris, talk about the residential market. That's what collapsed in 2007 and 2008. For the Federal Reserve's financial credit report that comes out, I believe, every quarter, the mortgages delinquency there is incredibly low, maybe slightly higher than 2021. Negative.

but still, yeah, negative. Yeah, for some banks, negative. I think for delinquencies, very, very, very, very minorly positive. But so then there's FHA, which is lower income folks, and the lender there is the government or the government is sponsoring those loans. Explain that. And then also, how is the Biden administration, you say, and the government involved with this commercial real estate thing? Because, Chris, with regards to commercial real estate, for literally four years, guests have been telling me on this show, as well as on the

television programs that commercial real estate is going to be a total disaster. And I think it's definitely fair to say that the pain that's been realized in commercial real estate has been way, way, way less than was advertised. And also, a lot of the commercial real estate pain has been idiosyncratic. For example, you've covered very well, New York Community Bank, formerly New York Community Bank, now known as Flagstar, they had some commercial real estate loan issues because the economy was collapsing? No, because a lot of the loans that they made were against rent-controlled

units. And so interest expense for landlords went up way more than they could raise the rents. And I know you've got your political views on that, but just leaving that aside, I think it's fair to say that there has not been a commercial real estate collapse in the United States or anything close to it. So yeah, just explain a few of these things. Well, you don't see the pain in commercial real estate because this is an institutional market.

It doesn't hit the news unless you're like me and you subscribe to the real deal so you can read about this stuff ad nauseum. You don't see it. Many commercial developers are private.

They hold these mortgages in their privately owned real estate investment trusts. So when they restructure them, you don't see the pain. The banks have a little bit of this, but the bond market is where a lot of the pain is. And then again, the private developers. So if you were to go look at Brookfield and look at some of the properties that they've had to sell over the last year, they've taken some big lumps. The numbers are large.

But the point is, is that it's not like a consumer market where you see it and you hear consumers complaining and sending in comments to the CFPB about these bad lenders. The lenders in the FHA market, on the other hand, are private companies, mostly non-banks. The government guarantees the loans, but there's no real backstop for those lenders. So what they did during COVID was they allowed lenders to do what are called partial claims.

which is how they keep people out of default, but they're in a forbearance program. The re-default rate on people who were in forbearance during COVID is quite high. It's like 70%.

So these are, you know, people who've had financial problems, lost a job, whatever. They modify the loan a couple of times so that they can keep it out of foreclosure, but it doesn't take. In other words, the borrower never gets back on track. And I think what you're going to see very soon is that the folks at the FHA are going to change the rules back to the way before, the way they were before COVID. And that's going to force the industry to clean out probably a couple hundred thousand borrowers.

who are all going to end up having to get out of their houses. That is not good politically, but from a financial perspective, I don't know that there's any way to avoid it. Can you tie the connection between your economic views about the Trump disruption and how it's impacting your views on commercial real estate and FHA? Do you think that, you know, would you be as bearish on credit if, say, Kamala Harris were president? Or

an old school variety of Republicans such as Mitt Romney who wasn't taking these departures? Yeah, that's a big difference. If Kamala Harris was in office, everything would be hunky dory and they would be hiding all of these problems until they couldn't. What you've seen with banks is very interesting with commercial, Jack. They don't any longer want to take over the building.

So they will forbear with those borrowers. That's why you haven't seen the pain, as you said earlier, right? And they'll leave them in the building. They'll reduce the interest rate on the loan. They'll modify the loan. You know, you mentioned Flagstar. All of the banks in New York that have credits like theirs are going to work with the borrowers. They're going to leave the borrower in the building because they don't want the building. You can see this in the data.

Banks are not taking real estate owned the way they used to in the old days, right? Why? Because they can't sell the building. And if they take over a building, you know, rent stabilized building in New York City, the city won't let them abandon it. The city will force them to take care of the building. So the banks, you know, they've learned insurance companies too, by the way, they don't take over these assets when they're delinquent. So you have this floating, uh,

detrius, if you will, in an economic sense that hasn't been resolved. Then let's remind everybody there's billions of dollars worth of stuff inside the Federal Deposit Insurance Corporation left over from Signature Bank.

They can't sell that either. And, you know, Marty Grunberg, the Democratic former chairman of the FDIC, didn't want to sell those assets. But if you look at the results of some of the sales that have occurred in the last month, they're pretty gruesome. They're taking 50 percent losses or more on the original valuation of the building. And these are buildings that are small and old. You know, in New York City, there's a cost to running a building. So if it's a small building, you're not going to make any money.

New York is filled with buildings that my ancestors built 200 years ago that need to go bye-bye. They need more square footage in order to be economically viable. But no one's talking about that. So you have politicians in these cities who go on and on about affordable housing, but they can't really do anything about it because the existing assets, frankly, are impaired.

And I think, you know, all the big blue cities in the U.S., Chicago, Los Angeles, New York, they all have the same problem, which is that you have a huge stock of older real estate that nobody wants. Meanwhile, there's an enormous flow of investment into new assets, particularly in the southern part of the U.S.,

markets like Texas, Florida, the Carolinas. New is good, old is bad. And when people put up a new mall in town, guess what happens to the old mall down the road? The valuation falls.

And Chris, what is your outlook on bank stocks? Going into this year, everyone and their mother and their grandmother and their grandfather was bullish on bank stocks because Trump was going to unleash the private enterprise. He was going to deregulate the banking sector. Why not, Chris, buy JPMorgan Bank of America? And that's exactly what people did. Now, wind the clock forward a few months. It is a much different world because of the potential economic turbulence that we've been discussing. What's your view on the bank stocks right now?

Well, they ran very well last year. JP Morgan got up to two and a half times book, which is

a high for them in recent years. I think what I would say is that deregulation is going to be helpful. Having all the bank regulators in Washington, including the Fed, reading off the same page, which is what Trump is going to do, is great. We love it. But I guess what I would say to you is that the banks have sold off a bit, not too much. They're still not particularly cheap.

But I, you know, I'm writing a note about the top seven. I think their earnings will be OK this quarter. There are other things going on in terms of, you know, have they been able to grow loans? Not so much. Deposits haven't been growing, so it's hard to grow loans. And I think for the rest of this year, they're going to be a little more worried about credit than they're worried about growth.

You know, I thought it was interesting, Brian Moynihan was going on yesterday about how consumers on his platform, which is enormous, are continuing to spend. He's seeing higher and higher spend. Great. But I think overall, the industry is currently chugging along a little bit below 1% return on assets. And I don't expect that to change simply because rates have been volatile.

You know, if you remember the third quarter last year when everybody was doing the happy dance and we had a big uptick in volumes, everybody thought rates were going to fall. We're going to have a recession. Right. Didn't happen. So if we have rates on hold for most of this year, I think you're going to see the banks kind of doing OK on the bank side of the ledger. You know, the security side, the investment side is probably going to be stronger.

and we'll just have to see how the year progresses. I don't think it's going to be a gangbuster year in terms of earnings growth by any means. And again, if you look at a GDP estimate from the Fed that's down significantly, that's going to ripple through to everybody's estimates for earnings as we go forward. And then if you're an analyst and you're sitting there playing with your model, right, what do you do with credit?

I think you have to increase it over the course of the year, very gradually, but credit costs are

are going to be a drag on earnings this year. Chris, are you neutral? Are you bearish? Just describe in greater detail your views on the banks and maybe which ones you like more than others in terms of sectors or individual names. I think you're going to want to be careful of the consumer lenders. Take a look at Ally. Ally was rocking last year, but by the end of 2024, they were almost down at the bottom.

of our index. We publish an index on the top 100 banks. I always look at position. When you looked at January, February of this year, all the big banks were gone. They had sold off. We had Bank of New York, for God's sake, at the top of the list. What are they doing there? And that's a processing play. Everybody thought, well, Wall Street's doing well. We want to own Bank of New York. I like Wells. I think Wells is probably the most improved

of the top seven. I think their cap on assets is gonna be removed relatively soon, but I don't know that they're gonna grow. Wells has been getting out of a lot of businesses. They've been selling a lot of businesses, and I think they're gonna focus more on equity returns and just the quality of earnings.

and basically resume their position right behind JP. JP is killing it. I don't know how anybody competes with JP Morgan, given their operational advantages over the other banks. But I would be careful of the consumer lenders. I think the asset gatherers, the investment shops are going to continue to do well. Ameriprise is the top of that group, by the way. Schwab is still kind of wounded. People haven't forgiven them yet.

You know, their performance on the bond side is still awful. And that's a big drag, by the way. If you look at PNC, Bank of America, Truist, what do they all have in common? They've got a yield on their investment book that's a point below pure average.

So one of the first things I look at, Jack, is what do we make on loans when I'm analyzing a bank? And then the second question is, what do we make on our securities portfolio and are we managing it properly? Look at American Express. They never skip the beat. I love those guys. And by the way, they don't own any mortgage backed securities.

Chris, one area of the stock market of the financial world that has taken on the chin in terms of their stock prices way more than the banks is the non-banks, the behemoths, the private credit, alternative asset managers, the Aries, the Apollos. Yeah, it's interesting how they fell out of favor so quickly. They really did. And you've had a little bit of a bounce over the past week, but peaked a trough as of a week ago. They were down something like 30% to 35%. That's right.

rebounded a little bit. What do you make of that business model where you're not having bank deposits, you're instead managing assets on behalf of other people, whether it's equity, real estate or credit, all of course in the private market, although some companies like Apollo actually have insurance operations and so their spread earnings actually exceed their fee earnings. So they are kind of like a bank, even though they don't have to make deposit. It's more like, I guess,

geico and berkshire hathaway so what do you make of that world as also in trump's america if banks are going to be unleashed is that going to be bad for the non-banks because hasn't a huge tailwind for the non-banks been the high level of regulation on the banks well that's a that's a big question you just asked i think what happened with the credit shops is that when

institutional investors saw them shoveling some of these opportunities into retail strategies, they saw that as a bad sign.

You mentioned Apollo and Athene. Apollo was very early realizing that having an insurance company which holds assets at book value and not at market value is kind of neat. And so they went out and bought a lot of annuity liabilities, and then they would invest in various assets to serve those customers and give them income.

Since really middle of last year, Athene has been forced to go from buying annuities to issuing debt in order to drive the balance sheet. And again, I think people saw that as a sign that the credit trade was kind of getting to the end and that maybe it was time to rotate out.

So banks benefited from this last year. I think one of the reasons that the commercial banks galloped along as fast as they did, especially in the second half of last year, was that the credit trade was getting tired. You know, people in the business, especially professionals, realize that credit in classical terms is something you fund with cash. If you use debt in a credit trade, you're asking for trouble.

And the whole point of the private credit is it's supposed to be safer because it's not funded with debt. It's funded with real money from institutions. Listen, private markets, whether it's private equity, private credit, I think are going to be a pain point this year and next.

I think you're going to see a lot of investigations of credit strategies that have been sold to pension funds and other regulated entities. You've already seen that in the UK, by the way. And I think you'll see more of that because even someone as pro-business and pro-market as Donald Trump is going to have to pay attention to this.

The pain is going to be considerable. You may see some significant losses from some of the larger pension funds in the U.S. because they don't know what they're buying. You know, and when I buy private equity and I have to rely on the manager to tell me what the valuation is, well, the manager has a conflict.

And I think that's a key, key pain point for the industry going forward. Everybody and their mother, private banks in Switzerland, you know, Lord Abbott, all of these retail shops here in the United States, we're all putting out credit strategies for individuals, for God's

sake. It's just not appropriate. I don't think it's a suitable investment for most individuals. And frankly, it's not suitable for most institutional investors either. Yeah, the stated returns have been quite high, but that doesn't mean that they will continue to be as high. It's a single digit trade now. There's too much competition for the assets. And ironically, you know, everybody was out trying to buy, quote unquote, distressed assets to feed into this engine. And they drove spreads down.

So you had a lot of junk companies out issuing debts. Thank you very much. Right. But it was the bid for these assets and to feed this in a credit strategy. So I think that caused it spread tightening last year. And credit spreads, which is publicly available for high yield investment grade bonds, near record tights, probably the tightest they've been since 2021 on a few days or a few months during 2005, 2006. I mean, what is going on? Chris Whalen, you've got

You yourself, who's by no means an opponent of President Trump, let's put it that way, is saying that it's going to be like 1837 when he's a tremendous amount of disruption and you have credit spreads at near tights. And what's not publicly available is the private credit spreads. Those spreads have been very, very tight as well. And also all of this 15% return is from yields being so high, but also spreads narrowing. So it's really, it can't continue.

Well, you know, it can and it can't. Let's put it this way. There's still a dearth, a lack of supply in terms of assets that are investable. The whole world is scouring the planet looking for assets. So in that sense, it's kind of an issuer's market. But at the same time, all we need is one surprise.

one entity that tips over, one pension fund that reports double-digit losses on their private equity book. And you could really change the tenor of this economy. Listening to the press conference yesterday with Chairman Powell, you almost got the sense that everybody in the room, all the media, Steve Leisman at CNBC, when you listen to their analysis afterwards, it was very cautious.

It was as though they had gotten bad news and they didn't quite know how to tell all of us about it. I just think for the life of me, we got to realize that at some point we are going to get a correction. So that's one of the reasons, you know, I told my flock a while ago, I said, these banks are fully valued. Wait for them to get cheaper. And that's what I would say about most financials. You want to be careful about the consumer lenders and very selective about the other ones that you pick.

I think that's the only way to be right now in this market. - I'd say that, yeah, looking at the non-banks, their financials are extremely complicated. So for example, I think Apollo, like whenever the stock market's up, they report a huge on paper net profit because of the annuities or something. So it may look like it's eight times earnings, but it's probably not. And then if the stock market declines a bunch, which it may this year, they're gonna report a huge loss. But again, that's kind of not necessarily

the same as if Pepsi loses or makes a billion dollars. It's not the same for Apollo. And Chris, how are you advising your clients, your flock, as you put it? You're cautious on the market. Are you seeing any opportunities on the long side? Or I mean, are you so bearish that you're actually considering shorting some of these companies? Or are you just in cash and very low risk securities? What are you doing?

Well, I have been largely in preferreds and financials. I had been thinking about starting a position in Wells and also US Bank because they were kind of beaten down. US Bank did a very big acquisition that took them several quarters to digest. Wells, I think, is just an interesting story because they are a great bank and they had some serious problems.

The rest of the group, I wouldn't buy JP because it's too expensive. You have to really go down lower than that, though, in terms of size to find value, I think.

You know, you don't want to look at a PNC or a Truist yet because they're still cleaning up their balance sheet. The banks I like, Jack, frankly, are the ones that have taken the pain, restructured their balance sheet, and all of a sudden they pick up half a point of NIM. So, for example, KeyBank, which is a big servicer in the commercial real estate space, really number two after Wells. Wells sold their commercial servicing operation, by the way, to a company called Trimont. It just closed.

And, you know, again, U.S. Bank, I think over time they're going to do very well. They're also restructuring their balance sheet. So, you know, you would ask me before about first quarter earnings. You're going to see a lot of people taking pain in the securities portfolio to clean out some of this low coupon stuff because they're not expecting a rate rally.

In the third quarter, when you had that rate rally, people sold a lot of paper. They were cleaning house. Even Bank of America was cleaning house. You're going to see more of this, but as the industry realizes that they're not going to get another rate rally this year, they're going to have to clean house and take the pain. But the good news is when they do that and they reinvest at a rate that's twice as high as the asset they sold, it's going to help them over time. Chris, I'm going to ask you a question, which is,

First, explain an observation I have, which I've got no commercial relationship with this ETF, but it's a well-known ETF, XLF, the financial sector ETF. I looked at what currently it holds, and it has a lot of non-bank financial companies. I'm not even talking about Apollo or the like. I'm talking about companies like Chicago CME Group or Visa and the like. And I'm just noticing that these companies have

you know, they, they have gone up over time and their revenues, net income margins and, and their profits have just soared over time, which is a very far cry from a lot of banks. Like for example, um, you know, progressive S and P global, uh, American express, which is the bank, uh, uh,

chubb a an intercontinental exchange which owns the new york stock exchange and uh you know paypal uh moody's all of these service like financial businesses that just i mean as a matter of fact have just absolutely trounced most banks in terms of return on equity in terms of returns and in terms of growth of

profits and perceived quality in the investor world. So Chris, and my observation, Chris, is that I then compared to what XLF owned in 2012, and it was all these regional banks that are now a tiny percentage of this ETF because they haven't performed as well. So I might have the view, and again, just sharing my view, no commercial relationship with this ETF, that XLF could perform better over time than it did in 2012 or definitely in 2007. And Chris, my question to you is,

Have you considered or have you done this of like,

concluding that for your own investing or for advising clients, to own more companies like Visa and a little bit less US banks in the world. Because Chris, there's so many companies like Warren Buffett, he loves being Bank of New York Mellon, but you look at the stock and it literally is basically where it was in 2000. US Bank, I know you love US Bank, but it's where it was in 2000. And obviously you've got the 3%, 4%, 5%, 6% dividend over time and that helps.

But like, Chris, you love the banks. You live and breathe the banks. I love the non-banks too. And I've, you know, but I'm talking about intellectually and I've inherited that from you. I've learned so much from you and I get it too. I love the banks too. But in terms of investing, have you kind of reached the conclusion or considered the conclusion that maybe

Like, you know, it's better to invest in Moody's and Visa and CME and people who do that will perform better than people who invest in JP Morgan and KeyBank. Well, I think the big difference between the two groups that you mentioned is that there's not a lot of credit risk with the non-bank service providers. They are growing with the economy. So Visa, MasterCard, I've owned those stocks in the past. You know, Block is another one that created a whole new

market for themselves with small card issuers. So, you know, to me, it's obvious that you want to own some of those utilities. That's what they are. These are infrastructure companies, ICE. You know, ICE owns infrastructure. That's what they do. They're also one of the few corporates out there, by the way, that has 50-year debt. Think about that for a minute.

How many corporates would be able to go out and issue 50 year debt? But it speaks to the solidity and the consistency of their earnings.

So I totally agree with you. I like some of these non-bank plays that you articulated. I write about the payments players because they have that quality, which is they're growing with the economy. Why is American Express often such a high value bank? And, you know, it's a $200 billion bank. It's because they have trillions of dollars flowing through their payments platform.

Even Citi, ironically enough, if they would just sell most of the bank and keep the payments platform, it would probably be trading at a lot more than book value.

Because that's the most valuable asset they have is the payments platform by far. And Chris, is that payments platform? I've heard you talk about it. I've read articles about it. Is that business to business, bank to bank? Is it the Visa? What Visa is for consumers? Is it that for bank to bank transactions? It's commercial and consumer.

Okay. Vast flows, by the way. And all of the banks are basically payments platforms. If you could just invest in that and isolate yourself from the reputational risk and the credit risk that comes along with a bank, and also the fact that it's regulated, you know, let's face it, the banks are lucky to make 10% equity returns.

The growth rates are low. They're barely making 1% on assets. You compare that to Visa or MasterCard, you know. But, you know, it's ironic. Look at Block. Block has been dead in the water. You know, I keep saying they shouldn't have changed the name and they shouldn't have bought all the Bitcoin because it confuses people. The payments platform inside of that company is great. I wish they would refocus on that. And what about PayPal? PayPal?

Yeah, that's it been doing that well as a stock. They are making noise. You can see the advertising. They are trying to keep up. But there is a brutal competition going on right now in payments. You can see it. They're all trying to get that little piece of mind share on the part of consumers. The average transactions are fighting over relatively small.

but they're all out there, both public and private companies. Let's describe the payment ecosystem where everyone is fighting. So PayPal, the company PayPal, which I've never used, people have, they don't call them deposits there, but PayPal makes money from just investing those in treasuries. They call them value-added services. And then they do make some loans. They've expanded to buy no pay later. There's another one. They bought Clover. Clover was a startup.

Smart buy. Everybody is trying to get their piece of the flow. That's the way I would put it. They want that payments flow. They want to take their little VIG off the top. Stripe is another one that I use on the website. There's a whole bunch of them. Klarna is just about the IPO. That's a buy now, pay later. So they're all trying to get little pieces of the consumer and make it their own.

And like I said, there's dozens of them, both public and private. Yeah. And I think when people have a loan or they use PayPal or they pay off, I know pay later with they paid off with a credit card or debit card. So it uses Visa and MasterCard. So Visa and MasterCard aren't necessarily being outcompeted, except when like if I peer to peer, if I send you money on Venmo, you send me money on Venmo, that would outcompete Visa and MasterCard. But do you see any serious threat to Visa and MasterCard? I mean, maybe stable coins, crypto?

No, Visa and MasterCard have a pretty, you know, difficult to attack monopoly position, largely because the vendors have accepted it. The Democrats keep trying to push down the interchange fees and thereby give vendors a little bit of lift on profits because, you know, a small vendor that takes credit cards, they get killed.

They get absolutely killed. Because as you know, some Republicans support that too, like Josh Hawley. Sure. And I think as the cost goes down, you are going to see more and more demands to pass those cost savings on to small businesses. But remember, this is still largely a bank monopoly. Visa, MasterCard, whoever it is, right? Even Block initially, they didn't own their own set of rails.

You know, why is Capital One buying Discover? Capital One didn't have their own set of payment rails for doing the inbound and outbound payments. So as time goes on and we see economies in this area, I think you're going to see it passed along to small business. That's the neat thing about innovation. But the banks still have a lock on master accounts facing the Federal Reserve.

That's where the cash ultimately has to go. So if your visa mastercard, you've got to work with banks, and they do. They work with banks all over the country. Chris, let's talk about the T word. Tariffs, tariffs, tariffs. Most economists, or at least my perception of most economists, regardless of where they are in the political spectrum, think that they will –

be bad for the economy and cause, well, that's a judgmental word, but cause disruption to the economy, disrupt global trade, and likely decrease real growth, whether that's by growth going down or by inflation going up or both. They think that tariffs will cause real growth to go down. And you saw the Federal Reserve lowering real growth assumptions for 2025 from memory from 2.1% to 1.7%. That's a lot of GDP. That's a lot of billions and billions of dollars.

What do you think about tariffs? Are they going to be as bad as the Federal Reserve and other mainstream economists think, or are they missing something? Your thoughts? I think they're missing something, which is that this is not about Donald Trump. This is about 75 years later, following the Bretton Woods Agreement. The United States has gotten weary of being the global reserve currency. We have gotten weary of being the policeman for the world.

So what Trump is essentially doing is saying, look, we need a more balanced relationship with the rest of your countries. We would like you to pay for your own defense. And by the way, I think down the road, there's going to be a conversation about the dollar because running the dollar is a global thing.

utility for everybody to use for payments, even if they don't use it as a store of value, right, is expensive. Americans pay for it with high deficits because let's face it, why do people use the dollar? It's big.

It can accommodate large trade flows. So if the US decides that they don't want to do that anymore, and that's implicitly the message coming from Trump, that changes a lot. I think it's much more than tariffs. People are belittling this issue, I think, by just talking about tariffs. Because let's face it, we had high tariffs in this country before World War I.

You know, people go on and on about Smoot-Hawley. And let's remember the Democrats wrote the history of the last hundred years in this country. Most of the major references that I used in my upcoming book were basically written from a Democratic perspective. They talk about free trade, they talk about the rest of it, right? But the truth of the matter is that all of these institutions, all of these understandings that we put in place after the Second World War have basically run their course.

And so what Trump is ultimately saying, implicitly, I think, is that they want to have a more balanced relationship with the world. And that may indeed see use of the dollar as a reserve currency decline over time.

So this isn't just about tariffs. This is about, I think, rebalancing the global economy. And it may even entail forcing some countries to hold more reserves in gold, hold reserves in other currencies, particularly trading partners. And that's kind of like the world was before World War I.

to be honest, we're going back there. Chris, I've done some very preliminary research into the tariffs of the 1890s. You know, President Trump has spoke very glowingly of McKinley and his tariffs. I know, isn't it great? Chris, Chris, the...

great bulk of tariffs of imports and exports in the United States in that period were very simple products like sugar and rice and tobacco. And now, you know, it's not just sugar and rice and tobacco. We got auto parts going from one part of Canada to the United States, back to Ottawa, back to Detroit, boom, boom, boom, very difficult products. I mean, you know, how,

Is it the global economy just too complicated to have reciprocal tariffs? And I don't want to make the argument that, oh, we shouldn't do this good thing because think of the paperwork. But is it literally impossible, especially while you're letting go a bulk of federal workers who are going to enforce this stuff? Yes and no.

Nothing is forever. This notion that the free trade that the US put in place after World War II when the rest of the world was destroyed is going to continue forever, I think is a very questionable assumption. What is really happening here is that we're going back to national treatment. I do think that over time you're going to have less integration in the world economy. There are certain nations like China,

that benefit from this integration because they're a mercantilist predatory state. They don't want to have an equal relationship with other nations. They want to take value more than they give.

So ultimately, you know, trade is a zero sum game. If you have growth, great. But the truth of the matter is, I think you're going to see the Europeans have to rely more upon themselves. You're going to see the US trying to at least in North America limit their interaction with the rest of the world. And, you know, I think most Americans actually support this. If you actually sit down with them and say, look, how do you feel about food prices? How do you feel about housing prices?

And you have that conversation with them. I think very quickly they end up supporting Donald Trump. Yes, but won't tariffs increase prices for food and housing and cars? But we already have that now. Look at the non-tariff barriers that Europeans have to American goods. They have a VAT, which is a tariff.

It was interesting. Murad Draghi took them all to task about a month ago in the Financial Times. He said, don't worry about the American tariffs. You have more trade restrictions inside Europe than the Americans are threatening you with now.

So, you know, I think all nations got very comfortable having the U.S. as the leader of the band and having us running big external deficits, which they in turn used for their own growth. Right. What happens if the U.S. gets control of its finances? And this is a demographic issue as well as an economic issue. And we're no longer pumping dollars into the global economy. That's what I think we're heading for.

And Chris, so President Trump quite clearly thinks that if Jack runs a trade deficit with Chris, that Chris is exploiting Jack and Chris is, quote unquote, treating Jack very unfairly. That's quite clear that President Trump thinks that. I don't think that. Most economists don't think that. And maybe, do you think that if the United States runs a trade deficit with Europe, that is not...

sufficient evidence that Europe is treating it very unfairly or that it's bad for the United States. India has a trade deficit, the United States has a trade deficit, and our growth has been very, very high. Trade surpluses are usually run by oil rich nations and China. And China's growth has been enormous, but it also has huge problems. And they reinvest those surpluses from trade back into the United States capital markets. Oh, yeah.

I understand that if China is only investing in gold and it's not buying dollar assets, that's a problem. And I think they, to some extent, are doing that or investing it around the world and not in the United States. But do you agree with Trump's automatic assumption that just because there's a trade deficit that we're being treated unfairly?

Well, I think that's correct the way you characterize him. But look, trade deficits don't matter until they do. In other words, if you have the dollar and you can issue as many paper dollars as you want, then the trade deficits don't matter. But if you actually have to start looking at your balance of trade and figuring out if you have enough currency in the central bank or in the treasury to finance it, which is the case with India, right?

Compare the two. Compare the U.S. and India and ask yourself whose hand of cards would you rather have? Obviously the United States, because people are still willing to accept these pieces of paper we issue, and therefore the deficits don't matter.

But I think what Trump is ultimately saying is that down the road, that may not be the case. And it behooves the United States to have a more balanced relationship with the world. You're not going to look for a trade surplus with the world, obviously not. But I think it speaks to the end of the dollar as an endlessly flexible currency. If you go back to Abraham Lincoln and what he did in the Civil War,

He essentially created a way to finance the Civil War that was not available. And because people were willing to hold these pieces of paper, which initially bore interest, remember, the greenback, when it was first issued by Lincoln, was a piece of debt. That's how everybody saw it. It wasn't money. It was a piece of debt. And it traded down a rather significant discount during the war versus gold.

So if you think of it in those terms, I think over time, yes, the role of the economy, the US economy and the rest of the world is going to change. And I do think we're going to have a more balanced relationship. Will we have a global currency? I don't think so. They've always talked about that, you know, at the IMF and the other multilateral organizations.

But I think you will see competition among nations based on their currency and how solid the currency is. So, you know, for example, the Chinese or the Russians could issue a gold-backed currency tomorrow. Now, are people going to use their money for trade and investing? No, they don't trust them.

That's our biggest advantage. They trust Americans. We're crazy. We're a little sloppy, but we still have relative confidentiality and secrecy when it comes to investments, which is a big attraction.

So the question is, can we adjust as a nation and get over World War II and really reach a place where we can manage the metabolism of our economy in a reasonable way? I think these are the questions that Trump is asking. But remember, if it wasn't Donald Trump, it would be somebody else. People shouldn't personalize this. This is a long-term trend that I think had to happen. I think I see what you're saying about like,

The hawkishness against China is a bipartisan phenomenon. If it wasn't Trump, it would have been someone else. I also want to be careful about, you know, Trump is kind of an oracle and you're interpreting what he's saying. I'm interpreting what he's saying. But I do remember Trump saying that he says he loves the U.S. dollar and he wants it to be a reserve currency. And he basically wants to punish and tariff anyone who tries to use BRICS. Well, shouldn't we have an admission price to Disneyland? I mean, everybody wants to get into this market. This is the best market in the world.

Yeah, that's an argument. Chris, when I talk to people who are, you know, maybe on the left Democratic side who think that this is going to be absolute chaos, I get concerned. Talking to you, who's on the other side of the shop, I'm also getting concerned. I feel like what's coming is a huge disruption to the economy and markets. And long term, it sounds like you're a supporter of it. But it sounds like, you know, even you say that, I mean, this is going to be extremely disruptive to financial markets. And I mean,

high yield spreads of 300 basis points are just not going to cut it. Look, I'm a nationalist at the end of the day. I believe, as President Trump does, that America comes first. We have been very generous with the rest of the world. How much more blood do they want?

you know and i think a lot of americans ask this question uh we have allowed our industries to be destroyed by foreign competition in the name of free trade and we keep telling ourselves that this is okay because we can finance our external deficits and our fiscal deficits uh at a certain point though it becomes so painful for the average american in terms of inflation

that you have to stop. And I think that's where we are. There was a fascinating interview in the Financial Times over the weekend with the finance minister, who is a really smart, interesting guy. And he said this. He said, look, this had to happen. America is weary.

And that's really the bottom line here. Yeah, I mean, I think globalization has many perceived deficiencies and adverse consequences, but I think it has been somewhat disinflationary. Like, I think if we hadn't had globalization, I think inflation would be higher. But yeah, people don't like it, Chris, when I share my views too much. But I also think that- Go ahead, it's okay.

This disruption that you perceive, okay, we're going to stop exporting dollars to the rest of the world so we can import their goods. They're going to stop exporting that capital back into our financial markets. And you know, Chris, I'm a

I'm a financial podcaster, but it's a financial show and a service, not a goods industry. You're a successful financier. So we have, you know, the past 40 years has been good for people who do what we do and bad for people who work in a factory. But think of how few nations there are out there that have really embraced a market-based economy.

versus the vast majority of countries that have been basically subsidizing their economies at our expense. Okay, that's a fair point. But Chris, what I was going to say is that they export that capital back to the United States and like Apollo, Aries, Goldman Sachs, Nvidia, in terms of the stock price,

the money, if the money stops flowing, that is going to be so bad for financial markets, us financial markets. And what have we seen this entire year, European Chinese stock markets exploding higher while the us stock market goes down. And even though, as we record this the day after Powell spoke, uh, on March 20th, we're seeing a little bit of a reversal of that actually, uh,

I think that could continue. Chris, thank you so much for your time, as always, sharing your insights. It's always a pleasure. And thanks for letting me get in the ring with you and share my own views a little bit. Tell us a little bit about the second edition of your book, Inflated, Money, Debt, and the American Dream. I read the book. It comes out in May. I enjoyed it, wrote a review about it. We can flash that on screen. But why did you want to do a second edition? What's the thesis of the book? And if you can,

How does it relate to the issues we've been talking about today? Well, inflated is a financial history of the United States. I think given what we've just been talking about, the only way Americans can make sense out of tariffs and the other changes that President Trump is trying to put in place is to understand how we got here.

So what I did with the book was I edited 20,000 words out of the front. I took all of the stuff about Henry Ford and the depression out because that was in my book, Ford Men, which I published after in 2017. And then I added a chapter at the end that talks about Janet Yellen and Jerome Powell and COVID and quantitative easing and really rewrote the last couple of chapters of the book to basically say, where do we take this experiment?

in the 21st century. What kind of role is America going to have with the rest of the world? And it's interesting. I have a great quote from Jim Rickards at the end of the book. And he says, look, if people want to take us seriously, we should be selling paper and buying gold. And I agree with him.

You know, I love Judy Shelton dearly, but the 50-year bond is not the answer. We have to make people understand that we are the most productive economy in the world. And if they want to have access to our markets, they have to treat us fairly. So if they don't have reciprocity with the U.S., they're going to get it.

And I think that's fair. Why should we subsidize the rest of the world? Well, thanks for sharing your views, Chris. People can find you on Twitter at RC Whalen. Again, the book is inflated. We'll include a link to that in the description. I'll be talking about trade tariffs and reserve flows a lot later today. I was speaking to Brad Setzer, so that will go out later this week. And people can find this show on YouTube. Please like and subscribe. It really helps the show.

Check out today's sponsor and also check out the show on Apple Podcasts, Spotify, wherever else you can find the podcast. And if you feel so inclined, please leave a rating and review. Thanks again. Thanks for watching. Remember to click the link in the description to learn more about the Tucurium Agricultural Fund Benchmark Index. Until next time. Thank you. Just close this door.