Chris Whalen: Fed Caused Housing Emergency, Rate Cuts Won't Fix It
Summary
Federal Reserve Policy: Chris Whalen criticizes the Fed for being late in cutting interest rates, suggesting they should have acted last year, and discusses the lack of coordination among central banks.
Housing Market Concerns: Whalen highlights a potential housing emergency due to affordability issues, exacerbated by the Fed's previous actions that drove up home prices, and predicts a correction in housing prices as supply increases.
Interest Rates and Mortgage Impact: The discussion covers the impact of recent Fed rate cuts on mortgage rates, with lenders adjusting their strategies based on anticipated rate changes, and the potential for mortgage rates to retreat slightly.
Precious Metals Investment: Whalen emphasizes the benefits of investing in gold, particularly through Monetary Metals, which offers a yield paid in physical gold, and suggests silver as a strategic investment due to its industrial uses.
Banking Sector Challenges: The podcast addresses the challenges faced by banks due to low yields on mortgage-backed securities, with some banks restructuring to improve profitability amid high mark-to-market losses.
Market Strategy and Stock Insights: Whalen shares his investment strategy, including taking profits from stocks like Nvidia and increasing his gold holdings, while expressing caution about the stock market's future trends.
Economic Outlook: The conversation touches on the mixed economic picture, with inflation impacting lower-income households significantly, and the potential for political and fiscal changes under the Trump administration.
Future of the Federal Reserve: Whalen speculates on potential changes to the Federal Reserve's structure and leadership, advocating for a return to a more decentralized system and a shift away from central planning.
Transcript
they're late. The Fed should have cut last year. I totally agree with that. You know, most of the other central banks, the ECB for example, are done. So, the notion that there was any coordination or synchronization between the central banks, I think, has been kind of left aside now. Um, should the Fed cut? Yeah, I'd like to see Fed funds a point lower than it was at the beginning of the year, but that's enough. Hey everyone, welcome to a very special episode of the Julia Larose show where we are joined live in studio with Chris Whan. He is the chairman of Whan Global Advisors, author of the institutional risk analyst blog, author of multiple books including including inflated money debt and the American dream um and a friend of this show, the very best independent analyst that you will find on Wall Street and making your debut for the first time in person with me. It's been a while. Thank you, Julia. >> I'm so thrilled to have you, Chris. This means >> Here we are in New York City. >> Yep. New York City, Friday, September 19th. We just had the FOMC this week with the the risk management 25 basis point rate cut. Maybe we should just start with the Fed this time. Um, we just had you on a couple weeks ago, but what was your takeaway from what we saw this week at the FOMC? Well, I had told my readers that I wasn't sure we had a majority for a rate cut. And I think the result indicates that Steve Mirren, the new governor, who was just barely confirmed in time for the meeting, uh, was the outlier. He was the only one that wanted a a half point cut. And I think the rest of them were much more comfortable with a quarter. And we may not see another cut for a couple of months simply because the numbers are still all over the place. >> Yeah. The dot plot. >> Yeah. the dot plot. The other interesting issue that nobody's talking about that we're going to write about next week is that housing is a big deal for the Trump administration. They're getting ready to probably announce a housing emergency in the US because of affordability. This was caused by the Fed. The Fed drove home prices up. So, they have, I think, a constraint as to how much they can really drop interest rates for the simple reason that the short-term rate cut, you know, Fed funds may or may not help housing. Hm. >> But if you start seeing home prices go up as a result of rate cuts and I think they're going to have to stop. >> Okay. When you mentioned housing, this is an area of expertise for you. >> Dig into that a bit more on like what are the scenarios that could play out. What are you hearing from folks in the space? >> Well, what I've seen from them since July was that they were dropping loan rates. We probably saw the coupons for 30-year mortgages drop half a point between July and last week. Now they're retreating because all of them were kind of betting on a half point. They were trying to get ahead of the other lenders because they want those loans and even if they lose money on the loans they made in August, they don't mind. They'll keep the servicing. They'll sell the loan at a loss and then they'll keep going. They're all thinking about third quarter last year and the big uptick in volumes we saw and they were trying to frontr run that. So it's going to be interesting since we only got a quarter of a point. I think you're actually going to see mortgage rates retreat a little bit. >> But what do you think is going to happen to housing prices then? >> They're already softening around the country. There's a number of analysts who've been writing about it. Uh even in places like Texas. Oh, yeah. Well, we had overbuilding. >> Yeah. >> People left New York, they went to Florida, they went to Texas and the Carolinas, you know, down by where you are in Raleigh and they built and they built. So, we have an overhang of new both single family homes and uh you know town houses, that sort of thing. Multif family as well is very soft now in Texas. And I think that's going to continue regardless of what the Fed does because remember, President Trump, he's a multif family guy. He probably understands New York City real estate better than anybody. He would like to be helpful because he can see the the problems that this sector is facing with the politics and you know we have this Marxist fellow who wants to be mayor of New York. He wants to freeze rent. Well, you freeze rent the whole asset class is going to go to hell. >> So, I think that the it's not clear to me how interest rates and housing are going to interact over the next year or two. >> Gold keeps setting new all-time highs, but price appreciation isn't the only way to profit from owning gold. Monetary Metals is redefining the future of precious metals investing. Instead of paying to store gold, imagine getting paid to own it. With Monetary Metals, you can earn up to 4% on your gold paid in physical gold. That's right. Your ounces grow each month, not just your paper balance. A yield on gold paid in gold means you're stacking more ounces every single month. And you still benefit if gold's prices rise. You're earning more gold every month and enjoying potential price appreciation at the same time. Go to monetary-medals.com/jullia to learn more and see how you can start earning 4% on your gold paid in gold. Um, I want to ask you this because so many folks have a lot of their net worth in in housing. That's where they've made so much of their net worth versus even like their jobs or whatnot. So, I imagine there's like this feeling of people who feel like, okay, they're quite prosperous because they've seen their housing prices go up. Then on the other side, there's folks like myself that I feel a little bit iced out of the market because it seems so ridiculous. So, I wonder what happens though to the psychology of like the homeowners if they see those prices come down. >> A lot of homeowners have been trying to sell at the top much the same way you see lenders selling their servicing assets at the top. They're trading for six, seven times annual cash flow, which is quite high. So, the way I think about it is homeowners should expect that there's going to be a correction. We've talked about this. Yeah. >> Uh my friend Stan Middleman, the founder of Freedom, predicted 2028, misery on the eights, right? We have another big correction. And I think that is still going to be the case. The Fed may slow that down. They may actually create a little mini boom next year in terms of volumes for lenders, which is fine. But then after that, we have to deal with the fact that affordability is still a big problem. >> Add that to the fact that we've had new supply coming online. That's always what we wait for is the supply. Once we see an over supply situation, you know, home prices are going to go down and that's happening. I think some markets are going to remain soft, especially in Texas, uh, even if interest rates fall because we have to clear out the market. The other thing is in places like Florida, new drives out the old. So when the that new mall is built down the road, the 10-year-old mall, and there's nothing wrong with that mall, right, suddenly drops in value, and your ability to finance it and fill it and everything else is degraded. >> That makes sense. And I think you also probably see that with office spaces too like office as well like >> office is another story. Office is a very strange story because office for 50 years was a premium asset class. Nobody could lose by building office space. Right? That's not the case anymore. But to your particular situation, wait for it. >> I think your market is going to correct. And if you want to go out and buy a house, I would do it 2 to 3 years from now. Rates will be low. you'll be looking at a five handle on a mortgage or maybe a four. Uh but I don't think we'll go down to the levels we saw with COVID because that would be so destructive. You know, if we saw another uptick in home prices and then had a correction, that would be a disaster, I think, for President Trump and the Republicans. >> Yeah. I want to go back to the Fed. Um the case for like maybe we might not see more rate cuts. Um, can you share more there because I'm having conversations with folks and some people are saying they need to cut even more. They should have cut a 50 basis point rate cut. >> They're late. The Fed should have cut last year. I totally agree with that. You know, most of the other central banks, the ECB for example, are done. So, the notion that there was any coordination or synchronization between the central banks, I think, has been kind of left aside now. Um, should the Fed cut? Yeah, I'd like to see Fed funds a point lower than it was at the beginning of the year, but that's enough. You know, if you look at the bond market, we're not having any trouble with issuance. If you look at housing, if we get mortgages down into the fives, you're going to solve the problem. Okay? You're a lot of lenders will make money. And then the banks, same way. The marktomarket problem that we had two years ago, Bank America particularly, that problem is going to be softened. It won't be fixed, but it'll at least help those banks dig their way out of the hole. The banks that restructured are actually doing very well. Give me an example. Truist truest did a big balance sheet restructuring and it drove their net income up dramatically in the space of a quarter. Other banks like Bank America have just been waiting for the Fed to come to their rescue. >> So, what's the issue with the balance sheets then? >> It's the mark to market from >> what we saw is like Silicon Valley Bank or is that different? It's a it is Silicon Valley Bank, but it was industrywide. Even today, given where interest rates are, the average yield on all of the mortgage back securities that are owned by US banks, it's a couple trillion dollars is uh you know, barely 3%. If you look at the market for mortgages, a 3% implies a price of like 85 83. So all of those bonds are 10 15 points underwater. They couldn't sell them without taking a loss. Also, the income that they throw off is not uh enough to make a profit. In other words, they're below the cost of funds for the bank. The Fed has the same problem. They have this huge portfolio of mortgage back securities that has a yield of like two and a quarter. And that's why they're losing so much money because they're paying almost twice that on reserves. The Fed has the same problem as Bank America. Isn't that kind of an interesting situation? And okay, say they have the same problem. What does that mean for them then? >> They have to wait until rates fall. >> That's basically when rates fall, prepayments on mortgage back securities will go up. The security will disappear faster. That's what they're hoping for. Now, I will tell you there are people in Washington today. They're talking about getting the Fed to go back and start buying mortgage back securities again. I would see that as a disaster. But there's so much pressure right now because of affordability, because of the politics of inflation, which are rippling through the entire housing sector that, you know, we could see some very interesting things. I've had Wall Street people say to me, well, you know, Fanny May and Freddy Mack should go out and buy mortgage back securities. And I said, wait a minute, they own the loans. They issued those securities. They're not going to buy them back. >> When Okay. When you say the politics of inflation, can you explain that a bit? >> When prices go up and people can't make ends meet, when low-income families in New York City have to pay 50 or 60% of their take-home income on housing, you have a political problem by definition, >> which is probably why we have >> and this is not unlike the problem we had in this country a century ago after World War I when people were moving to the cities. They had grown up on the farms. They moved to the cities never to come back. And they had to deal with food prices, housing prices that were astronomical. You had a lot of inflation in that period. And that's part of the reason you saw regulatory structures created. That's part of the reason you had a lot of other uh legislative initiatives both in the 20s and in the 30s during the Great Depression. >> You just reminded me of something. So, let me pull it up because I want to like ask this because a viewer asked this from last time. You were just on nine days ago >> on the show. So, this is a really special month because we have you twice. So, I just want to uh read a comment um because you made me think of it and I don't want to leave this viewer hanging. So, he said, "Julia, Chris made some very brief comments on the housing market which needs to be elaborated on for clarity and more in-depth information. He mentioned I don't know if I I don't remember all this stuff. So he mentioned 1924 indicating its relevance for today, but I don't know that history. He also made he also said home prices could drop to 21 2021 prices, but there's going to be a run on home buying. I'm sure he didn't mean that to sound contradictory. I don't know if it did or not, but clarification would be helpful. Also, if he does um into de if he goes into depth on house on the housing market history in his book, maybe you or he could point out that in the upcoming interview. My thought on home prices has been for a while is that the mortgage rates were way too low leading up to the co inflation induced interest rate hikes. So if mortgage rates are held around five or 6% and inventory goes back to a balanced market, the prices could potentially go down to pre 2% mortgage home prices. Just a theory, of course. Anyway, hoping you can you and he can dive further into the housing market this weekend or another interview in the very near future. >> Oh, okay. Well, thank you for the question. Uh first off, I would recommend that um your listener or viewer uh read the uh great crash 1929 by John Kenneth Galbrath because in that book he talks about Florida. During the 1920s, people were buying little square foot uh pieces of Florida real estate and it became like the tulip boom in in the early you know uh centuries before in in the Netherlands, right? it went crazy and then finally just before the great crash on Wall Street couple years before it started to weaken and collapse. So have a look at Galra's book. It's a wonderful book. His commentary on that age is is still precious today. I I would just also recommend for people who are really interested in this, buy my uh biography of Stan Middleman, which you can still get on my website and I'll sign it for you. I've only got about 30 copies left. So, if you want one, get one. >> No, you guys should totally get one. I can link it. >> Stan is one of the smartest people in in you know, the whole housing complex. He started with nothing. He now owns one of the biggest private companies in the United States. And it's because he's careful, he's smart, and he surrounds himself with people who are really smart. So, what he has said to me, he goes, "Look, it's about supply. We have low rates. We have demand. Home prices go up. Eventually, we're going to get supply. and we have supply. Now, this Fed rate cut is going to slow down and and maybe delay the price correction that she was alluding to in her question. I think unfortunately we could go sideways a little bit with home prices, but by 2728, we're really going to have to see a correction downward simply because we're going to run out of buyers as we have today. >> Yeah, that's the misery on the eights. >> Misery on the eights. And look, I I love Stan dearly. I really have a lot of respect for his perspective and things change. It's never the same. If he was sitting here with us, he would tell you that. But his two key factors that he learned from Paul Vulkar are employment and interest rates. Those are the two things you look at to run a mortgage company. >> Yeah. Well, I appreciate you taking their question. Um, and I love when folks leave um, questions in the comment section. We have Chris on every month because we are so fortunate. You were just in DC. M >> I want to hear about your trip to DC because I think there's a conversation around GSEs. >> Yes. I I was one of several people Bob Brooksmith the uh president of the mortgage bankers association and Ed DeMarco who's head of a big trade association in Washington now who used to run the regulator for Fanny May and Freddy Mack. He was one of the early directors of what we call the FHFA. Um, what I would tell you is there's still a lot of speculation. The industry has been holding meetings with Treasury. Basically, Treasury asks questions. The industry gives them very cautious answers and they scribble down notes. Whether they'll pay any attention to this or not is is hard to say. I think the current state of speculation is that they may do an offering of shares for Fanny May and Freddy Mack without taking them out of conservatorship, which I personally don't think is very attractive. But we got to wait. We still don't have a road map from these people. Jonathan Mccernin, who used to be on the board of the FDI, is still waiting to be confirmed by the Senate. Uh Chuck Schumer from New York of course is holding him hostage because the Democrats are trying to get Trump to agree not to cut spending anymore. I don't think that's going to happen. So my guess is they're going to do something with Fanny May and Freddy Mack, but they have a lot of work to do. We need a new management team. we need to replace every other employee because over the past 17 years they've gone from being buyers of conventional mortgages to quai regulatory agencies and they just have this almost post officel-like mentality which is inappropriate for a company uh you know that's in the private sector but more importantly it I I just don't see how they would function because a lot has changed since 2008 Julia you have big big competitors like Mr. Cooper and Rocket who are emerging. You have other firms like Penny, United Wholesale. They're not going to just stand by and let the GSC's do business as they emerge from government control. And then you have the big dog JP Morgan which has the same rating as the United States now and they are the largest issuer of private mortgages in the country. They have an enormously profitable business. And I think that, you know, if you think about the market today, 30% of it's Jinny May at the bottom, really made for low-income borrowers. The middle is the conventional market, Fanny May and Freddy Mack. And then the top 30 some odd percent is the banks for their own portfolio and what we call jumbos, the private market. Private market is expanding very rapidly. Why? Inflation. those loans are now too big. Yeah. To qualify as a conventional mortgage. So otherwise they they could but when they get over that million one million two level for the high price markets on either coast they have to be done privately. That means if you have a condo 23 million condo somewhere you go to the bank. Yeah. >> You go to Wells, you go to JP Morgan. US Bank is now the number two bank player in mortgages in the United States. So, you know, these guys are not going to just sit there and let the GSC's do business as they have before. >> Interesting. Okay. I didn't think about that. Um, is it still a trade that you have on? Like, >> no, I got in and out. Okay. >> I I did about 30% on Fanny May uh back in uh July, August. >> How did I make that trade? They stopped talking about it. >> You're like, "Okay, I'm out." You got in when they were stopping. >> Yeah, they stopped talking about it. And Fanny traded off. it fell pretty dramatically. You've now had Deutsche Bank come out with a buy rating on both stocks, which I think is absurd. I don't see how an analyst could do that with a penny stock. Uh, and we still don't know what's going to happen with them. >> There may be nothing happening with those stocks. They may create a new entity that will be the issuer of shares that in turn owns both of them. >> Interesting. >> The treasury may contribute their shares to a new holding company. So, what happens to the public shareholders of the two entities? They may end up owning a stock that's illquid, >> huh? >> So, we don't know. We have to wait, but we'll talk about it next week. >> We will definitely keep talking about it. Okay. Um, the last time we spoke, which was again just last week, um, you talked about taking your acorns off the table, like um, taking a lot out of the market, out of the stock market. >> I don't know. Has anything changed for you in the last nine days or so? >> No. No. I'm I'm very happy. Yeah, my >> my alerts on Nvidia got kicked at $180 and I had a stop loss right underneath. So, I just let the the shares go. I had a 50% gain in Nvidia, you know. God bless you, Jim Kramer, by the way. Uh, >> wait, you got that from Kramer? >> No, years ago, this during co, right, Jimmy's pounding the table on Nvidia and it had traded awful lot. Yeah. >> The world was uncertain. Nobody knew what was going on. >> So, I was like, okay. So, I got in, rode the thing up, got out, then the stock splits, right? >> Yeah. >> Goes back. Then I got back in, rode the thing up. Now, Jimmy says, "Well, you got to hold on to it." I don't think so. I think it's more of a story stock. It has a big China dimension, and I love TAC, as I was telling you before the show, I used to cover semiconductor Capital Equipment, which we don't even talk about anymore. Yeah. Sunnyale, California. Um, and so for me, I took my banks. I had bought American Express. I had bought a little Schwab. And I I I sold them all right in front of Jackson Hall. >> Okay. Yeah. >> I just said, "No, I want to get out." Because I think the next leg is going to be much more focused on the trade deficit and also on the fiscal deficit in the United States. The dollar is at the low. I think we're going to see a lot of pressure on the Treasury market because remember October 1st we're going to start spending a lot more money >> and there's other issues in the background that I I don't particularly care for. So I put those acorns into gold. I've increased my gold position across the portfolio. Um I don't own any bank common now. I still have a fair amount of bank preferred and I'm happy with that. I uh you know I think I told you this before. My my best position ever over the last five years is Williams, the pipeline company. >> Yeah, you did tell me that. >> It's incredible. But great company. They do stuff that people need. And I I still have a few other stocks that I own. I love Toyota. I've owned that stock forever. Uh is it doesn't go up a whole lot, but I think they're going to be the winner in autos. >> Interesting. Um this is more of just a curiosity of someone who's been in the markets for many many years. The psychology of it because um you know in the I'll just again I'll reference like a comment section. I'll read the comment section on the show and if I have a guest who's you know a little bit more bearish or cautious they'll say oh stocks are at all-time highs and like they talk about the bull market and this and that. How do you kind of manage the psychology of it when stocks are moving higher but you're like hey I'm happy with my wins. I took my profits here. Does that is there a psychology to it? Does it even phase you? >> No. I think as you know, as somebody who started on the street as a sales trader, I always take the profits when they're there. >> Um when I lose my conviction about the trend, >> why not take the money off the table? I can always get back in. Yeah. >> If I'm wrong. Uh but more importantly, I like to watch the herd. I'll give you a great example. Uh the company formerly known as Square that we now call Block. very strange uh story, but I was really focused on them very early on. And I thought to myself, oh, the buyside manager community is going to go looking for fintech. This was really early in the fintech hype, right? >> Sure enough, they all discovered Square and the stock went up to over $200. It was crazy. I had gotten in at like 50. And I'm looking at this and I'm saying to myself, it had gotten so big relative to the rest of my portfolio that I I had to trim the uh the hedges, right? So, you know, I I try and do fundamental research, as you know, I'm mostly a fundamental analyst, but I don't ignore the technicals and you can't ignore the emotion of Wall Street because there's a limited number of stocks out there. Half the market is passive now. >> Yes, >> they just buy and sell according to the algorithm. So the other half is still run by managers and independent uh adviserss. You have to be cognizant of what they're doing because they they do move the market and with tech with other things. Look, everybody I'll give you another great example. The best performing bank stock in the second quarter of the large banks, right, was City, JP Morgan, all the rest of them fell back in the group. And then you had SoFi was number one. Lending Club, back from the dead, >> okay, >> suddenly got their act together, had some interesting things to say. The managers loved it. They just piled in there. Is Lending Club really a great business to ride into a recession with? >> We'll see. So, too, I love the story. They're now getting big enough to grow into that Silicon Valley overhead they have. They have the highest overhead ratios in the industry because they like to pay themselves well, but they have an untested model in terms of credit. They're mostly doing unsecured consumer now. Not not student loans. >> They're doing credit cards. They're doing mortgages. So, they have a lot of consumer exposure on their book. And I think eventually they may correct a little bit. >> Yeah. I want to go back to something you said about the trade from here on out. It's around the debt and the deficit, weaker dollar, pressure on treasuries. Can you elaborate a bit more on the thesis because that did pique my interest and I think it's something that the audience would love to hear as well. >> The dollar and the Treasury market obviously are correct, you know, totally linked. The dollar is now below the lows of Trump one. I think it's going to go lower. >> Again, the deficit's going to increase. We're not going to make it up on tariffs. We're making money on tariffs, don't get me wrong, but we're not going to make it up. And we're going to eventually have a new Fed chairman, who I think will be Kevin Hassid, uh, who will give the boss what he wants. Now, the only caveat here is again, home prices. You don't want to drop interest rates so much that you're going to drive home prices up another five or 10%. Because politically, that is going to be poisonous. Yeah. You want to stay away from that if you can. So the question is how can we be helpful to the economy with interest rates which is the Fed's traditional tool right without causing more problems elsewhere. I don't think that commercial real estate multif family which is the new subprime are going to be particularly helped if the Fed cuts rates because those are very idiosyncratic situations. They're very local. So, if you have progressive politics in New York or Chicago or wherever, that's not going to help multif family real estate and it's certainly not going to help uh commercial office uh properties either. So, it's it's kind of a funny situation. I think Trump is going to get what he wants on the Fed. He is going to change the Fed dramatically. We are going to get the Fed out of the uh central planning mode that they've been in since the New Deal, and we're going to take them back much more to what it was before. uh Franklin Roosevelt centralized the Fed in Washington. Remember the the board of governors in Washington didn't exist until 1935. >> Okay. >> The original Fed was this sleepy little decentralized central bank that was owned by the banks. >> Yeah. >> Now, in order to get a Federal Reserve Bank president approved, you have to have the ascent of the board of governors. I think Trump is going to leave a lot of those positions empty next year. >> Okay. That's interesting too because um one of the conversations around the Fed and we just had Daniel D. Martina Booth in studio yesterday um is a lot of these banks, the Fed banks were during like the railroad age. So I guess like in the Midwest for example, like St. Louis, Kansas City, Cleveland, like >> you know, and then you have um the San Francisco Fed. So would that also include kind of like reconfiguring like where you have these >> location? Board of Governors actually has the authority to restructure the system. So you would turn some branches out in the West into full-blown banks. >> That's what you'll do. You already have them there. >> You know, I'll give you example. San Francisco covers the entire West Coast. >> Yeah. West Coast is massive. >> Yeah. It makes no sense. So you need another uh reserve bank in California, probably down in the south. You need another one probably up in Seattle. >> Yeah. and then maybe somewhere down in the southwest. So, think about three more. And then legislatively, the change I would love to see is get rid of the board of governors in Washington. Just don't have one. We can turn the new headquarters into a a new annex for the federal courts. They've already got security, nice location on Constitution Avenue. And then I would have all of the 15 presidents uh nominated by the president and confirmed by the Senate. So, we would get rid of governors. We wouldn't have governors. You would have a chairman and they could rotate the chairmanship, frankly. Uh, but why not have them all confirmed by the Senate, >> appointed by the president? It's nice and clean and it kind of ends the weird uh deviation, I call it, uh, from the New Deal. >> And who would have the authority to do this? Is this act of Congress or is this like >> you need legislation for the the second part of what I was saying? >> My other curiosity is the mandate. You heard pal talk about there. He even acknowledges like there's tension between, you know, maximum employment, inflation. Sure. >> Do the does the mandate even work? Does it make sense together? Should they rethink >> $35 trillion in >> Wasn't that also an act of Congress, too? Like in 1978 19 Very good. 1978. >> Okay. >> It was a compromise. The Democrats wanted to guarantee jobs for everybody. It was after the war. >> Sounds nice. Yeah. >> Uh the Republicans said, "No, we will use interest rate policy to guarantee full employment." >> Okay. That doesn't really work because by by using interest rates instead of other tools, we have driven interest rates down more and more and particularly you saw with co we drove it down to the floor 0% essentially and look what happened to home prices because housing has always been the primary conveyor belt if you will for monetary policy. They would goose home prices when I was a kid like you know Paul Vulkar uh drove them up almost to 20% housing market almost collapsed and then they went back down and you had a boom. So Americans got used to that. Americans love inflation when it comes to their homes. >> You know, you go ask. >> Yeah. I mean, you feel prosperous, right? You feel like a millionaire, right? It's like, >> right, but there's other factors involved that are good and bad. I'll give you example. Home prices in the south and the southwest are going to decline because we had overbuilding. Meanwhile, up in the north, in the blue states, home prices aren't weakening because there's no new construction. >> There's a constraint on supply. >> And that might be a political thing then. >> Oh, it's a totally political thing. you you don't even want to talk about building anything in New York City because the politics there have gotten so poisonous. I mean, think about the fact that AOC thinks that she can run for president. These people are delusional, but that's okay. Let them have their delusions. >> H um just to go back to the comment at the top, the housing emergency that they might be worried about. >> Yep. remind me again like what uh >> they're going to declare an emergency because it makes a good press release and then they're going to probably use some rather populist notions to help the home uh market. Specifically, the spread between the treasuries and mortgage rates right now is quite wide. >> Why? Because the Fed stopped buying >> during co the Fed was buying mortgage back securities. That's why they >> they were buying almost all of the mortgage back securities that were issued during that period. >> So that's the conversation around the resumption of doing that. >> I have another question. >> A profoundly bad idea by the way. But you remember Trump is not a conservative and most of the people around him are not conservative. They're populists. So you're going to get some things like, you know, Bill Py embracing the idea of multiple credit scores in the lending process, which makes no sense at all. you know, but that's that's the kind of proposals you're going to see from them. >> Yeah. Um this week, um we did see the 10-year dip below four. >> Yes. >> Briefly, I don't know where it is today. I have not looked. So, sorry. Sorry, guys. I don't know. >> Was was there significance to that in your mind or what do you make of it? Is there >> I think the street just rallied it because they were anticipating the rate cuts. I think it's going to retreat now simply because you got a quarter instead of a half. Mhm. >> And I also think the vote uh the nature of the vote was such that we're not sure they're going to cut again next month. >> Interesting. >> So the street's going to have to figure out what to do with that. Mortgage lenders too were gunning it as I said before. Right from July on we went from 6 and 78 down to 6 and a quarter in 2 months. That was because all of those lenders were trying to get in front of a rate cut, capture some assets, even if they would lose money selling those loans. It's okay. They'll keep the servicing. But they wanted to position themselves so that if you had a half point rate cut in September and the market took off, you know, you see maybe loan rates go down to six, they would be able to capture those volumes. >> Mhm. It's a tough uh business to judge because, you know, you're always trying to figure out what's going to happen next. You've got to have the capacity to take those incoming phone calls if people need a mortgage. And a lot of consumers are they're very smart now. They're not just sitting there waiting for the Fed to tell them what to do. They know where rates are. They're constantly looking for a better deal. So, when rates started falling, home sales started to pick up. >> See? >> Yeah. I see. Um, what is your take on the economy today? >> It's a mixed picture. There are parts of it that are going extremely well. If you're wealthy and you have a big stock portfolio, you feel good. Uh, but if you're in the bottom quartortile of income, you're you're hurting. Inflation is killing you. >> Yeah. Uh, and that's the politics that that to me is should be the most important topic in Washington, but it's not because nobody wants to talk about cutting the de uh the federal deficit. >> Yeah. Um, in your book you write about um the debt and the deficit. What is in your mind what is that like one myth around debt or the deficit that you would like your readers to unlearn or finally get right? Well, the the myth I think is that Americans are really concerned about inflation and Americans love inflation. The the priority for Americans throughout our history has been to have enough money. If you really study American history, they were always worried about the fact that we didn't have enough physical cash to do business. Barter was the primary means of exchange in this country until well after the Civil War. We used to use pieces of eight. Think about that. Spanish money. You know what was the first reserve currency in the modern era? Roman dinari >> and then after that Spanish pieces of eight like where all these things go too. >> That's why I'm working on a gold book. Uh but I think that you know to me the notion of debt is misunderstood. The federal uh public debt is essentially currency and eventually the Fed is going to be forced to buy it and turn it into currency. they will monetize it in in a very similar way that we saw during the civil war when they used unbacked paper greenbacks to finance the conflict. In today's money, it was like $10 billion if you could imagine which and at the time people were horrified. A lot of states didn't even want to accept paper and California never accepted paper during the Civil War. They would only accept gold. So, you know, to me, the re the return of gold as the global reserve asset should tell Americans that things are going to change and we have to start thinking about getting ourselves a little bit more disciplined about fiscal issues because we're going to have to compete with other nations. >> Would that be your highest conviction trade right now is gold? >> Uh, yeah. I'm not I'm not taking any of the positions off. If anything, I'm adding to it. I'm also starting to look at silver. Silver has recently been identified by the Trump administration as a strategic mineral. >> So, you know, I I'm going to write about that soon. It it it's it's been a orphan for a long time because silver was so plentiful a 100 years ago. Most nations, Germany, you know, and many others said, "Well, we're not going to coin silver anymore." But it's used in industry. Silver is consumed. And I do think it's going to have its its day. It's been a long time coming. Uh and I love some of the leverage you get from the junior miners in both the silver and the gold sector because let's face it, Chinese are the biggest producers of gold. After them is the Russians. Are they selling? No. Uh US is well well down the list. But we'll we'll do fine. I I think Steve Mirren is wrong. You don't sell gold to drive the dollar down. You you buy gold with paper and you force everybody in the world to take your paper until they don't want to anymore. That's how you get the dollar to be and the dollar is going to go down. So if you want to trade, I I would be looking at the dollar as an interesting trade visa v Gold. >> Interesting. Chris, I have to say this has been awesome and I I always say I love having you on the show, but the in-person episode's just been incredible and I love listening to you. I love learning from you. This audience does as well. So, I just want to thank you again for being so generous with your time, all of your knowledge, your wisdom, helping us all learn and get better. Chris Whan, chairman of Whan Global Advisors. Really appreciate you taking the time. My pleasure, Julia.
Chris Whalen: Fed Caused Housing Emergency, Rate Cuts Won't Fix It
Summary
Transcript
they're late. The Fed should have cut last year. I totally agree with that. You know, most of the other central banks, the ECB for example, are done. So, the notion that there was any coordination or synchronization between the central banks, I think, has been kind of left aside now. Um, should the Fed cut? Yeah, I'd like to see Fed funds a point lower than it was at the beginning of the year, but that's enough. Hey everyone, welcome to a very special episode of the Julia Larose show where we are joined live in studio with Chris Whan. He is the chairman of Whan Global Advisors, author of the institutional risk analyst blog, author of multiple books including including inflated money debt and the American dream um and a friend of this show, the very best independent analyst that you will find on Wall Street and making your debut for the first time in person with me. It's been a while. Thank you, Julia. >> I'm so thrilled to have you, Chris. This means >> Here we are in New York City. >> Yep. New York City, Friday, September 19th. We just had the FOMC this week with the the risk management 25 basis point rate cut. Maybe we should just start with the Fed this time. Um, we just had you on a couple weeks ago, but what was your takeaway from what we saw this week at the FOMC? Well, I had told my readers that I wasn't sure we had a majority for a rate cut. And I think the result indicates that Steve Mirren, the new governor, who was just barely confirmed in time for the meeting, uh, was the outlier. He was the only one that wanted a a half point cut. And I think the rest of them were much more comfortable with a quarter. And we may not see another cut for a couple of months simply because the numbers are still all over the place. >> Yeah. The dot plot. >> Yeah. the dot plot. The other interesting issue that nobody's talking about that we're going to write about next week is that housing is a big deal for the Trump administration. They're getting ready to probably announce a housing emergency in the US because of affordability. This was caused by the Fed. The Fed drove home prices up. So, they have, I think, a constraint as to how much they can really drop interest rates for the simple reason that the short-term rate cut, you know, Fed funds may or may not help housing. Hm. >> But if you start seeing home prices go up as a result of rate cuts and I think they're going to have to stop. >> Okay. When you mentioned housing, this is an area of expertise for you. >> Dig into that a bit more on like what are the scenarios that could play out. What are you hearing from folks in the space? >> Well, what I've seen from them since July was that they were dropping loan rates. We probably saw the coupons for 30-year mortgages drop half a point between July and last week. Now they're retreating because all of them were kind of betting on a half point. They were trying to get ahead of the other lenders because they want those loans and even if they lose money on the loans they made in August, they don't mind. They'll keep the servicing. They'll sell the loan at a loss and then they'll keep going. They're all thinking about third quarter last year and the big uptick in volumes we saw and they were trying to frontr run that. So it's going to be interesting since we only got a quarter of a point. I think you're actually going to see mortgage rates retreat a little bit. >> But what do you think is going to happen to housing prices then? >> They're already softening around the country. There's a number of analysts who've been writing about it. Uh even in places like Texas. Oh, yeah. Well, we had overbuilding. >> Yeah. >> People left New York, they went to Florida, they went to Texas and the Carolinas, you know, down by where you are in Raleigh and they built and they built. So, we have an overhang of new both single family homes and uh you know town houses, that sort of thing. Multif family as well is very soft now in Texas. And I think that's going to continue regardless of what the Fed does because remember, President Trump, he's a multif family guy. He probably understands New York City real estate better than anybody. He would like to be helpful because he can see the the problems that this sector is facing with the politics and you know we have this Marxist fellow who wants to be mayor of New York. He wants to freeze rent. Well, you freeze rent the whole asset class is going to go to hell. >> So, I think that the it's not clear to me how interest rates and housing are going to interact over the next year or two. >> Gold keeps setting new all-time highs, but price appreciation isn't the only way to profit from owning gold. Monetary Metals is redefining the future of precious metals investing. Instead of paying to store gold, imagine getting paid to own it. With Monetary Metals, you can earn up to 4% on your gold paid in physical gold. That's right. Your ounces grow each month, not just your paper balance. A yield on gold paid in gold means you're stacking more ounces every single month. And you still benefit if gold's prices rise. You're earning more gold every month and enjoying potential price appreciation at the same time. Go to monetary-medals.com/jullia to learn more and see how you can start earning 4% on your gold paid in gold. Um, I want to ask you this because so many folks have a lot of their net worth in in housing. That's where they've made so much of their net worth versus even like their jobs or whatnot. So, I imagine there's like this feeling of people who feel like, okay, they're quite prosperous because they've seen their housing prices go up. Then on the other side, there's folks like myself that I feel a little bit iced out of the market because it seems so ridiculous. So, I wonder what happens though to the psychology of like the homeowners if they see those prices come down. >> A lot of homeowners have been trying to sell at the top much the same way you see lenders selling their servicing assets at the top. They're trading for six, seven times annual cash flow, which is quite high. So, the way I think about it is homeowners should expect that there's going to be a correction. We've talked about this. Yeah. >> Uh my friend Stan Middleman, the founder of Freedom, predicted 2028, misery on the eights, right? We have another big correction. And I think that is still going to be the case. The Fed may slow that down. They may actually create a little mini boom next year in terms of volumes for lenders, which is fine. But then after that, we have to deal with the fact that affordability is still a big problem. >> Add that to the fact that we've had new supply coming online. That's always what we wait for is the supply. Once we see an over supply situation, you know, home prices are going to go down and that's happening. I think some markets are going to remain soft, especially in Texas, uh, even if interest rates fall because we have to clear out the market. The other thing is in places like Florida, new drives out the old. So when the that new mall is built down the road, the 10-year-old mall, and there's nothing wrong with that mall, right, suddenly drops in value, and your ability to finance it and fill it and everything else is degraded. >> That makes sense. And I think you also probably see that with office spaces too like office as well like >> office is another story. Office is a very strange story because office for 50 years was a premium asset class. Nobody could lose by building office space. Right? That's not the case anymore. But to your particular situation, wait for it. >> I think your market is going to correct. And if you want to go out and buy a house, I would do it 2 to 3 years from now. Rates will be low. you'll be looking at a five handle on a mortgage or maybe a four. Uh but I don't think we'll go down to the levels we saw with COVID because that would be so destructive. You know, if we saw another uptick in home prices and then had a correction, that would be a disaster, I think, for President Trump and the Republicans. >> Yeah. I want to go back to the Fed. Um the case for like maybe we might not see more rate cuts. Um, can you share more there because I'm having conversations with folks and some people are saying they need to cut even more. They should have cut a 50 basis point rate cut. >> They're late. The Fed should have cut last year. I totally agree with that. You know, most of the other central banks, the ECB for example, are done. So, the notion that there was any coordination or synchronization between the central banks, I think, has been kind of left aside now. Um, should the Fed cut? Yeah, I'd like to see Fed funds a point lower than it was at the beginning of the year, but that's enough. You know, if you look at the bond market, we're not having any trouble with issuance. If you look at housing, if we get mortgages down into the fives, you're going to solve the problem. Okay? You're a lot of lenders will make money. And then the banks, same way. The marktomarket problem that we had two years ago, Bank America particularly, that problem is going to be softened. It won't be fixed, but it'll at least help those banks dig their way out of the hole. The banks that restructured are actually doing very well. Give me an example. Truist truest did a big balance sheet restructuring and it drove their net income up dramatically in the space of a quarter. Other banks like Bank America have just been waiting for the Fed to come to their rescue. >> So, what's the issue with the balance sheets then? >> It's the mark to market from >> what we saw is like Silicon Valley Bank or is that different? It's a it is Silicon Valley Bank, but it was industrywide. Even today, given where interest rates are, the average yield on all of the mortgage back securities that are owned by US banks, it's a couple trillion dollars is uh you know, barely 3%. If you look at the market for mortgages, a 3% implies a price of like 85 83. So all of those bonds are 10 15 points underwater. They couldn't sell them without taking a loss. Also, the income that they throw off is not uh enough to make a profit. In other words, they're below the cost of funds for the bank. The Fed has the same problem. They have this huge portfolio of mortgage back securities that has a yield of like two and a quarter. And that's why they're losing so much money because they're paying almost twice that on reserves. The Fed has the same problem as Bank America. Isn't that kind of an interesting situation? And okay, say they have the same problem. What does that mean for them then? >> They have to wait until rates fall. >> That's basically when rates fall, prepayments on mortgage back securities will go up. The security will disappear faster. That's what they're hoping for. Now, I will tell you there are people in Washington today. They're talking about getting the Fed to go back and start buying mortgage back securities again. I would see that as a disaster. But there's so much pressure right now because of affordability, because of the politics of inflation, which are rippling through the entire housing sector that, you know, we could see some very interesting things. I've had Wall Street people say to me, well, you know, Fanny May and Freddy Mack should go out and buy mortgage back securities. And I said, wait a minute, they own the loans. They issued those securities. They're not going to buy them back. >> When Okay. When you say the politics of inflation, can you explain that a bit? >> When prices go up and people can't make ends meet, when low-income families in New York City have to pay 50 or 60% of their take-home income on housing, you have a political problem by definition, >> which is probably why we have >> and this is not unlike the problem we had in this country a century ago after World War I when people were moving to the cities. They had grown up on the farms. They moved to the cities never to come back. And they had to deal with food prices, housing prices that were astronomical. You had a lot of inflation in that period. And that's part of the reason you saw regulatory structures created. That's part of the reason you had a lot of other uh legislative initiatives both in the 20s and in the 30s during the Great Depression. >> You just reminded me of something. So, let me pull it up because I want to like ask this because a viewer asked this from last time. You were just on nine days ago >> on the show. So, this is a really special month because we have you twice. So, I just want to uh read a comment um because you made me think of it and I don't want to leave this viewer hanging. So, he said, "Julia, Chris made some very brief comments on the housing market which needs to be elaborated on for clarity and more in-depth information. He mentioned I don't know if I I don't remember all this stuff. So he mentioned 1924 indicating its relevance for today, but I don't know that history. He also made he also said home prices could drop to 21 2021 prices, but there's going to be a run on home buying. I'm sure he didn't mean that to sound contradictory. I don't know if it did or not, but clarification would be helpful. Also, if he does um into de if he goes into depth on house on the housing market history in his book, maybe you or he could point out that in the upcoming interview. My thought on home prices has been for a while is that the mortgage rates were way too low leading up to the co inflation induced interest rate hikes. So if mortgage rates are held around five or 6% and inventory goes back to a balanced market, the prices could potentially go down to pre 2% mortgage home prices. Just a theory, of course. Anyway, hoping you can you and he can dive further into the housing market this weekend or another interview in the very near future. >> Oh, okay. Well, thank you for the question. Uh first off, I would recommend that um your listener or viewer uh read the uh great crash 1929 by John Kenneth Galbrath because in that book he talks about Florida. During the 1920s, people were buying little square foot uh pieces of Florida real estate and it became like the tulip boom in in the early you know uh centuries before in in the Netherlands, right? it went crazy and then finally just before the great crash on Wall Street couple years before it started to weaken and collapse. So have a look at Galra's book. It's a wonderful book. His commentary on that age is is still precious today. I I would just also recommend for people who are really interested in this, buy my uh biography of Stan Middleman, which you can still get on my website and I'll sign it for you. I've only got about 30 copies left. So, if you want one, get one. >> No, you guys should totally get one. I can link it. >> Stan is one of the smartest people in in you know, the whole housing complex. He started with nothing. He now owns one of the biggest private companies in the United States. And it's because he's careful, he's smart, and he surrounds himself with people who are really smart. So, what he has said to me, he goes, "Look, it's about supply. We have low rates. We have demand. Home prices go up. Eventually, we're going to get supply. and we have supply. Now, this Fed rate cut is going to slow down and and maybe delay the price correction that she was alluding to in her question. I think unfortunately we could go sideways a little bit with home prices, but by 2728, we're really going to have to see a correction downward simply because we're going to run out of buyers as we have today. >> Yeah, that's the misery on the eights. >> Misery on the eights. And look, I I love Stan dearly. I really have a lot of respect for his perspective and things change. It's never the same. If he was sitting here with us, he would tell you that. But his two key factors that he learned from Paul Vulkar are employment and interest rates. Those are the two things you look at to run a mortgage company. >> Yeah. Well, I appreciate you taking their question. Um, and I love when folks leave um, questions in the comment section. We have Chris on every month because we are so fortunate. You were just in DC. M >> I want to hear about your trip to DC because I think there's a conversation around GSEs. >> Yes. I I was one of several people Bob Brooksmith the uh president of the mortgage bankers association and Ed DeMarco who's head of a big trade association in Washington now who used to run the regulator for Fanny May and Freddy Mack. He was one of the early directors of what we call the FHFA. Um, what I would tell you is there's still a lot of speculation. The industry has been holding meetings with Treasury. Basically, Treasury asks questions. The industry gives them very cautious answers and they scribble down notes. Whether they'll pay any attention to this or not is is hard to say. I think the current state of speculation is that they may do an offering of shares for Fanny May and Freddy Mack without taking them out of conservatorship, which I personally don't think is very attractive. But we got to wait. We still don't have a road map from these people. Jonathan Mccernin, who used to be on the board of the FDI, is still waiting to be confirmed by the Senate. Uh Chuck Schumer from New York of course is holding him hostage because the Democrats are trying to get Trump to agree not to cut spending anymore. I don't think that's going to happen. So my guess is they're going to do something with Fanny May and Freddy Mack, but they have a lot of work to do. We need a new management team. we need to replace every other employee because over the past 17 years they've gone from being buyers of conventional mortgages to quai regulatory agencies and they just have this almost post officel-like mentality which is inappropriate for a company uh you know that's in the private sector but more importantly it I I just don't see how they would function because a lot has changed since 2008 Julia you have big big competitors like Mr. Cooper and Rocket who are emerging. You have other firms like Penny, United Wholesale. They're not going to just stand by and let the GSC's do business as they emerge from government control. And then you have the big dog JP Morgan which has the same rating as the United States now and they are the largest issuer of private mortgages in the country. They have an enormously profitable business. And I think that, you know, if you think about the market today, 30% of it's Jinny May at the bottom, really made for low-income borrowers. The middle is the conventional market, Fanny May and Freddy Mack. And then the top 30 some odd percent is the banks for their own portfolio and what we call jumbos, the private market. Private market is expanding very rapidly. Why? Inflation. those loans are now too big. Yeah. To qualify as a conventional mortgage. So otherwise they they could but when they get over that million one million two level for the high price markets on either coast they have to be done privately. That means if you have a condo 23 million condo somewhere you go to the bank. Yeah. >> You go to Wells, you go to JP Morgan. US Bank is now the number two bank player in mortgages in the United States. So, you know, these guys are not going to just sit there and let the GSC's do business as they have before. >> Interesting. Okay. I didn't think about that. Um, is it still a trade that you have on? Like, >> no, I got in and out. Okay. >> I I did about 30% on Fanny May uh back in uh July, August. >> How did I make that trade? They stopped talking about it. >> You're like, "Okay, I'm out." You got in when they were stopping. >> Yeah, they stopped talking about it. And Fanny traded off. it fell pretty dramatically. You've now had Deutsche Bank come out with a buy rating on both stocks, which I think is absurd. I don't see how an analyst could do that with a penny stock. Uh, and we still don't know what's going to happen with them. >> There may be nothing happening with those stocks. They may create a new entity that will be the issuer of shares that in turn owns both of them. >> Interesting. >> The treasury may contribute their shares to a new holding company. So, what happens to the public shareholders of the two entities? They may end up owning a stock that's illquid, >> huh? >> So, we don't know. We have to wait, but we'll talk about it next week. >> We will definitely keep talking about it. Okay. Um, the last time we spoke, which was again just last week, um, you talked about taking your acorns off the table, like um, taking a lot out of the market, out of the stock market. >> I don't know. Has anything changed for you in the last nine days or so? >> No. No. I'm I'm very happy. Yeah, my >> my alerts on Nvidia got kicked at $180 and I had a stop loss right underneath. So, I just let the the shares go. I had a 50% gain in Nvidia, you know. God bless you, Jim Kramer, by the way. Uh, >> wait, you got that from Kramer? >> No, years ago, this during co, right, Jimmy's pounding the table on Nvidia and it had traded awful lot. Yeah. >> The world was uncertain. Nobody knew what was going on. >> So, I was like, okay. So, I got in, rode the thing up, got out, then the stock splits, right? >> Yeah. >> Goes back. Then I got back in, rode the thing up. Now, Jimmy says, "Well, you got to hold on to it." I don't think so. I think it's more of a story stock. It has a big China dimension, and I love TAC, as I was telling you before the show, I used to cover semiconductor Capital Equipment, which we don't even talk about anymore. Yeah. Sunnyale, California. Um, and so for me, I took my banks. I had bought American Express. I had bought a little Schwab. And I I I sold them all right in front of Jackson Hall. >> Okay. Yeah. >> I just said, "No, I want to get out." Because I think the next leg is going to be much more focused on the trade deficit and also on the fiscal deficit in the United States. The dollar is at the low. I think we're going to see a lot of pressure on the Treasury market because remember October 1st we're going to start spending a lot more money >> and there's other issues in the background that I I don't particularly care for. So I put those acorns into gold. I've increased my gold position across the portfolio. Um I don't own any bank common now. I still have a fair amount of bank preferred and I'm happy with that. I uh you know I think I told you this before. My my best position ever over the last five years is Williams, the pipeline company. >> Yeah, you did tell me that. >> It's incredible. But great company. They do stuff that people need. And I I still have a few other stocks that I own. I love Toyota. I've owned that stock forever. Uh is it doesn't go up a whole lot, but I think they're going to be the winner in autos. >> Interesting. Um this is more of just a curiosity of someone who's been in the markets for many many years. The psychology of it because um you know in the I'll just again I'll reference like a comment section. I'll read the comment section on the show and if I have a guest who's you know a little bit more bearish or cautious they'll say oh stocks are at all-time highs and like they talk about the bull market and this and that. How do you kind of manage the psychology of it when stocks are moving higher but you're like hey I'm happy with my wins. I took my profits here. Does that is there a psychology to it? Does it even phase you? >> No. I think as you know, as somebody who started on the street as a sales trader, I always take the profits when they're there. >> Um when I lose my conviction about the trend, >> why not take the money off the table? I can always get back in. Yeah. >> If I'm wrong. Uh but more importantly, I like to watch the herd. I'll give you a great example. Uh the company formerly known as Square that we now call Block. very strange uh story, but I was really focused on them very early on. And I thought to myself, oh, the buyside manager community is going to go looking for fintech. This was really early in the fintech hype, right? >> Sure enough, they all discovered Square and the stock went up to over $200. It was crazy. I had gotten in at like 50. And I'm looking at this and I'm saying to myself, it had gotten so big relative to the rest of my portfolio that I I had to trim the uh the hedges, right? So, you know, I I try and do fundamental research, as you know, I'm mostly a fundamental analyst, but I don't ignore the technicals and you can't ignore the emotion of Wall Street because there's a limited number of stocks out there. Half the market is passive now. >> Yes, >> they just buy and sell according to the algorithm. So the other half is still run by managers and independent uh adviserss. You have to be cognizant of what they're doing because they they do move the market and with tech with other things. Look, everybody I'll give you another great example. The best performing bank stock in the second quarter of the large banks, right, was City, JP Morgan, all the rest of them fell back in the group. And then you had SoFi was number one. Lending Club, back from the dead, >> okay, >> suddenly got their act together, had some interesting things to say. The managers loved it. They just piled in there. Is Lending Club really a great business to ride into a recession with? >> We'll see. So, too, I love the story. They're now getting big enough to grow into that Silicon Valley overhead they have. They have the highest overhead ratios in the industry because they like to pay themselves well, but they have an untested model in terms of credit. They're mostly doing unsecured consumer now. Not not student loans. >> They're doing credit cards. They're doing mortgages. So, they have a lot of consumer exposure on their book. And I think eventually they may correct a little bit. >> Yeah. I want to go back to something you said about the trade from here on out. It's around the debt and the deficit, weaker dollar, pressure on treasuries. Can you elaborate a bit more on the thesis because that did pique my interest and I think it's something that the audience would love to hear as well. >> The dollar and the Treasury market obviously are correct, you know, totally linked. The dollar is now below the lows of Trump one. I think it's going to go lower. >> Again, the deficit's going to increase. We're not going to make it up on tariffs. We're making money on tariffs, don't get me wrong, but we're not going to make it up. And we're going to eventually have a new Fed chairman, who I think will be Kevin Hassid, uh, who will give the boss what he wants. Now, the only caveat here is again, home prices. You don't want to drop interest rates so much that you're going to drive home prices up another five or 10%. Because politically, that is going to be poisonous. Yeah. You want to stay away from that if you can. So the question is how can we be helpful to the economy with interest rates which is the Fed's traditional tool right without causing more problems elsewhere. I don't think that commercial real estate multif family which is the new subprime are going to be particularly helped if the Fed cuts rates because those are very idiosyncratic situations. They're very local. So, if you have progressive politics in New York or Chicago or wherever, that's not going to help multif family real estate and it's certainly not going to help uh commercial office uh properties either. So, it's it's kind of a funny situation. I think Trump is going to get what he wants on the Fed. He is going to change the Fed dramatically. We are going to get the Fed out of the uh central planning mode that they've been in since the New Deal, and we're going to take them back much more to what it was before. uh Franklin Roosevelt centralized the Fed in Washington. Remember the the board of governors in Washington didn't exist until 1935. >> Okay. >> The original Fed was this sleepy little decentralized central bank that was owned by the banks. >> Yeah. >> Now, in order to get a Federal Reserve Bank president approved, you have to have the ascent of the board of governors. I think Trump is going to leave a lot of those positions empty next year. >> Okay. That's interesting too because um one of the conversations around the Fed and we just had Daniel D. Martina Booth in studio yesterday um is a lot of these banks, the Fed banks were during like the railroad age. So I guess like in the Midwest for example, like St. Louis, Kansas City, Cleveland, like >> you know, and then you have um the San Francisco Fed. So would that also include kind of like reconfiguring like where you have these >> location? Board of Governors actually has the authority to restructure the system. So you would turn some branches out in the West into full-blown banks. >> That's what you'll do. You already have them there. >> You know, I'll give you example. San Francisco covers the entire West Coast. >> Yeah. West Coast is massive. >> Yeah. It makes no sense. So you need another uh reserve bank in California, probably down in the south. You need another one probably up in Seattle. >> Yeah. and then maybe somewhere down in the southwest. So, think about three more. And then legislatively, the change I would love to see is get rid of the board of governors in Washington. Just don't have one. We can turn the new headquarters into a a new annex for the federal courts. They've already got security, nice location on Constitution Avenue. And then I would have all of the 15 presidents uh nominated by the president and confirmed by the Senate. So, we would get rid of governors. We wouldn't have governors. You would have a chairman and they could rotate the chairmanship, frankly. Uh, but why not have them all confirmed by the Senate, >> appointed by the president? It's nice and clean and it kind of ends the weird uh deviation, I call it, uh, from the New Deal. >> And who would have the authority to do this? Is this act of Congress or is this like >> you need legislation for the the second part of what I was saying? >> My other curiosity is the mandate. You heard pal talk about there. He even acknowledges like there's tension between, you know, maximum employment, inflation. Sure. >> Do the does the mandate even work? Does it make sense together? Should they rethink >> $35 trillion in >> Wasn't that also an act of Congress, too? Like in 1978 19 Very good. 1978. >> Okay. >> It was a compromise. The Democrats wanted to guarantee jobs for everybody. It was after the war. >> Sounds nice. Yeah. >> Uh the Republicans said, "No, we will use interest rate policy to guarantee full employment." >> Okay. That doesn't really work because by by using interest rates instead of other tools, we have driven interest rates down more and more and particularly you saw with co we drove it down to the floor 0% essentially and look what happened to home prices because housing has always been the primary conveyor belt if you will for monetary policy. They would goose home prices when I was a kid like you know Paul Vulkar uh drove them up almost to 20% housing market almost collapsed and then they went back down and you had a boom. So Americans got used to that. Americans love inflation when it comes to their homes. >> You know, you go ask. >> Yeah. I mean, you feel prosperous, right? You feel like a millionaire, right? It's like, >> right, but there's other factors involved that are good and bad. I'll give you example. Home prices in the south and the southwest are going to decline because we had overbuilding. Meanwhile, up in the north, in the blue states, home prices aren't weakening because there's no new construction. >> There's a constraint on supply. >> And that might be a political thing then. >> Oh, it's a totally political thing. you you don't even want to talk about building anything in New York City because the politics there have gotten so poisonous. I mean, think about the fact that AOC thinks that she can run for president. These people are delusional, but that's okay. Let them have their delusions. >> H um just to go back to the comment at the top, the housing emergency that they might be worried about. >> Yep. remind me again like what uh >> they're going to declare an emergency because it makes a good press release and then they're going to probably use some rather populist notions to help the home uh market. Specifically, the spread between the treasuries and mortgage rates right now is quite wide. >> Why? Because the Fed stopped buying >> during co the Fed was buying mortgage back securities. That's why they >> they were buying almost all of the mortgage back securities that were issued during that period. >> So that's the conversation around the resumption of doing that. >> I have another question. >> A profoundly bad idea by the way. But you remember Trump is not a conservative and most of the people around him are not conservative. They're populists. So you're going to get some things like, you know, Bill Py embracing the idea of multiple credit scores in the lending process, which makes no sense at all. you know, but that's that's the kind of proposals you're going to see from them. >> Yeah. Um this week, um we did see the 10-year dip below four. >> Yes. >> Briefly, I don't know where it is today. I have not looked. So, sorry. Sorry, guys. I don't know. >> Was was there significance to that in your mind or what do you make of it? Is there >> I think the street just rallied it because they were anticipating the rate cuts. I think it's going to retreat now simply because you got a quarter instead of a half. Mhm. >> And I also think the vote uh the nature of the vote was such that we're not sure they're going to cut again next month. >> Interesting. >> So the street's going to have to figure out what to do with that. Mortgage lenders too were gunning it as I said before. Right from July on we went from 6 and 78 down to 6 and a quarter in 2 months. That was because all of those lenders were trying to get in front of a rate cut, capture some assets, even if they would lose money selling those loans. It's okay. They'll keep the servicing. But they wanted to position themselves so that if you had a half point rate cut in September and the market took off, you know, you see maybe loan rates go down to six, they would be able to capture those volumes. >> Mhm. It's a tough uh business to judge because, you know, you're always trying to figure out what's going to happen next. You've got to have the capacity to take those incoming phone calls if people need a mortgage. And a lot of consumers are they're very smart now. They're not just sitting there waiting for the Fed to tell them what to do. They know where rates are. They're constantly looking for a better deal. So, when rates started falling, home sales started to pick up. >> See? >> Yeah. I see. Um, what is your take on the economy today? >> It's a mixed picture. There are parts of it that are going extremely well. If you're wealthy and you have a big stock portfolio, you feel good. Uh, but if you're in the bottom quartortile of income, you're you're hurting. Inflation is killing you. >> Yeah. Uh, and that's the politics that that to me is should be the most important topic in Washington, but it's not because nobody wants to talk about cutting the de uh the federal deficit. >> Yeah. Um, in your book you write about um the debt and the deficit. What is in your mind what is that like one myth around debt or the deficit that you would like your readers to unlearn or finally get right? Well, the the myth I think is that Americans are really concerned about inflation and Americans love inflation. The the priority for Americans throughout our history has been to have enough money. If you really study American history, they were always worried about the fact that we didn't have enough physical cash to do business. Barter was the primary means of exchange in this country until well after the Civil War. We used to use pieces of eight. Think about that. Spanish money. You know what was the first reserve currency in the modern era? Roman dinari >> and then after that Spanish pieces of eight like where all these things go too. >> That's why I'm working on a gold book. Uh but I think that you know to me the notion of debt is misunderstood. The federal uh public debt is essentially currency and eventually the Fed is going to be forced to buy it and turn it into currency. they will monetize it in in a very similar way that we saw during the civil war when they used unbacked paper greenbacks to finance the conflict. In today's money, it was like $10 billion if you could imagine which and at the time people were horrified. A lot of states didn't even want to accept paper and California never accepted paper during the Civil War. They would only accept gold. So, you know, to me, the re the return of gold as the global reserve asset should tell Americans that things are going to change and we have to start thinking about getting ourselves a little bit more disciplined about fiscal issues because we're going to have to compete with other nations. >> Would that be your highest conviction trade right now is gold? >> Uh, yeah. I'm not I'm not taking any of the positions off. If anything, I'm adding to it. I'm also starting to look at silver. Silver has recently been identified by the Trump administration as a strategic mineral. >> So, you know, I I'm going to write about that soon. It it it's it's been a orphan for a long time because silver was so plentiful a 100 years ago. Most nations, Germany, you know, and many others said, "Well, we're not going to coin silver anymore." But it's used in industry. Silver is consumed. And I do think it's going to have its its day. It's been a long time coming. Uh and I love some of the leverage you get from the junior miners in both the silver and the gold sector because let's face it, Chinese are the biggest producers of gold. After them is the Russians. Are they selling? No. Uh US is well well down the list. But we'll we'll do fine. I I think Steve Mirren is wrong. You don't sell gold to drive the dollar down. You you buy gold with paper and you force everybody in the world to take your paper until they don't want to anymore. That's how you get the dollar to be and the dollar is going to go down. So if you want to trade, I I would be looking at the dollar as an interesting trade visa v Gold. >> Interesting. Chris, I have to say this has been awesome and I I always say I love having you on the show, but the in-person episode's just been incredible and I love listening to you. I love learning from you. This audience does as well. So, I just want to thank you again for being so generous with your time, all of your knowledge, your wisdom, helping us all learn and get better. Chris Whan, chairman of Whan Global Advisors. Really appreciate you taking the time. My pleasure, Julia.