Federal Reserve & Policy: Extensive discussion on Fed independence, decentralization, and refocusing the mandate toward the soundness of the dollar rather than economic micromanagement.
Precious Metals: Bullish stance on gold and silver driven by central bank purchases, asymmetric risk-reward, and investor under-allocation, with the guest personally increasing exposure.
Commercial Real Estate: Ongoing stress in office markets with deep markdowns in major cities, likely repurposing needs, and potential municipal revenue impacts via tax abatements.
Banks & Credit: Money-center banks’ reported numbers look solid due to accounting changes and forbearance, but underlying CRE exposures and private credit dynamics remain important risks.
Housing & Rates: Conforming loan limit increases risk fueling further home price inflation; near-term cuts in short rates could re-accelerate housing and set up a later correction.
Macro Risks: BOJ rate normalization underscores rising global funding costs and latent sovereign debt concerns across major economies.
Market Outlook: Overall markets appear stable, but the probability of surprise shocks from lesser-known names and background stresses is rising into the new year.
Transcript
I think the White House ought to stop talking about interest rates because people are concerned about some of the rhetoric they hear from the White House. And I think Kevin Hasset's behavior, he is responding to that concern. Julia, that's what's so interesting. Hey everyone, welcome back to another episode of the rap with Chris Whan, chairman of Whan Global Advisors, author of the institutional risk analyst blog, where we recap what's happening in markets and the economy every single week. Chris, great to see you as always. I love doing this with you. >> Yeah, likewise, Julia. Merry Christmas. >> Merry Christmas. The last one before the holidays here. Um >> That's right. >> Yeah. Um, and I know the audience has just been absolutely loving this. So, I'm grateful to everyone who's been tuning in week after week. All right, Chris, let's start with the Federal Reserve as our first topic. Specifically, who might be Fed Chair Kevin Hasset? We got to talk about Kevin Hasset because I know we have been discussing him. Do Do you think he blew his chances? >> Uh, you know, it's interesting. He's clearly been the favorite for a while. First and foremost, because he's close to the president. uh Fed chairman typically go through the White House, either the Council of Economic Advisors or the NEC or both. So, you know, if I thought this was a done deal to be honest with you, Julia, but then I saw him in the media this week kind of walking back some of the Trump conservative views on the Fed, saying that, you know, he'd listen to the president, but he was going to be data dependent and Trump wasn't going to tell him what to do because Hassid is beginning to do what all Fed chairman do, which is play to the history books. So, you know, you look at that and you say to yourself, hm, cuz if he continues in that vein, I think he's going to hurt his chances. And remember, there are two Kevins. And we have Kevin Worsh, who I love. I think Kevin Worsh would be a great chairman, breath of fresh air. Uh, he terrifies the Fed staff because they know that he would come in and, uh, make a lot of changes. That essay I just did in the international economy about reforming the Fed is very much I think attuned to the way Kevin Worsh looks at the place because what Franklin Roosevelt did in 1935 was turn it into a very European style authoritarian model and and really got away from the Jeffersonian uh decentralized model that Congress originally approved in 1913. You know, FDR did a lot of things under the rubric of crisis and emergency that would surprise many Americans. And I don't think people, for example, realize just how far-left Mariner Eckles and some of his fellow travelers were during the New Deal. These people were hardcore communists who had no, you know, care or or affection for uh small town America and the kind of limited government and and other basic uh you know, freedoms and foundations that you have. When you walk around uh Washington and you see these great uh Italian uh buildings with the eagles on top, that all comes from that period because you know FDR and all the leadership in the US essentially ran out of ideas. So they were borrowing statist ideas from Germany and Italy and even Russia during that period. >> Yeah. Chris, as you mentioned, your piece in the international economy, how to really reform the Fed, an irreverent take on the US history of money. It was an enjoyable read. I learned a lot a lot of history as you were just referencing there. Okay. So, you argue though for returning to a decentralized Fed. >> Yes. >> Uh with 15 district banks whose presidents are Senate confirmed, >> right? How would this actually change the Fed policy daytoday compared to what we have now? >> I think it would get the central bank a little bit out of the limelight politically if you physically get them out of Washington and have the chairmanship rotate among the different presidents around the country. You're going to, I think, provide a little bit of distance for the central bank. And the key recommendation I make in the essay is that the sole mandate for the Fed should be the soundness of the dollar. Uh we've got to get the Fed out of this economic management mode that has only really been the case since Roosevelt, which is kind of a a central planning uh function. I don't believe that the Fed does a particularly good job doing that. And I think, you know, given the amount of debt the country has and the other issues that we face, we need an anchor that is a voice for keeping the dollar as stable and as valuable as possible. Um because, you know, there's a couple of great quotes in there with uh my friend Alex Pollock who's at the Mises Institute. Alex was head of Chicago uh Federal Home Loan Bank for quite a a long period. He worked in the banking industry and he said something fascinating. He said, you know, the Fed must be independent of the president, but it cannot be independent of the Congress because ultimately it's a creature of the Congress. Uh, does the Congress understand what the Fed does? Probably not. I I can count on the fingers of two hands, uh, members of Congress who actually understand finance at all. Uh, but you know what I'm saying? From a structural point of view, you don't want the president telling the Fed what to do directly because he's the borrower. >> You know, the Fed is his banker. >> Uh but on the other hand, their power comes from Congress, the power to coin money directly from the Constitution. So, you can't have the central bank be independent of Congress. That's when they they get creative and and and start mission creep as they say, and that's not a good thing. >> Let me ask you this. as you point out um your friend Alex Pollock um you had some interviews with him and you referenced him in the piece that Treasury is the borrower and the Fed is the banker um and the two functions cannot be under the power of the president. I guess the question for you is >> does Congress also lack the technical expertise for monetary policy >> as it's conducted today? Yes, Julia, but I would like to change that. I think the Fed needs to do less. I think the Treasury is clearly uh the first among equals when it comes to financial policy for the United States. And there's certain things that the Fed should never do. They should never compete with the Treasury by issuing their own T bills, for example. That's what they did during CO. We have what what were called reverse repurchase agreements, which is essentially the Fed raising money in the short-term markets. They can't compete with the Treasury. That's one of the big problems. You know, people debate about whether the Fed should pay interest to banks on reserves, but that's something that they have to do today because the size of their balance sheet is so big. All of the instruments in the money market have to be roughly the same yield if you think of it. So whether it's a T bill issued by the Treasury or it's a instrument like a reserve deposit at the Fed, they have to keep them more or less the same because otherwise the whole system would tip over. uh you'd have banks running out of reserves and buying tea bills and then the next day would be bad. So, you know, that's why the Congress gave the Fed that power back in oh god it was more than a decade ago. >> So, also just going back into the piece and a bit more of history. So, post 1935 that power became concentrated. It wasn't just in Washington but it was with the Fed chair position. How has that I'm so curious about this like explaining this idea. How has that like distorted I guess that model has distorted monetary policy? What have been some of the ramifications we've seen because of that model? >> Well, the chairman is the chief executive of the agency and he runs the staff. So to the extent the staff um is really the ones making policy on a day-to-day basis and the governors are there essentially to give their ascent. The chairman drives policy very clearly. You know, you can remember the period with Alan Greenspan when people got out of line and he didn't like some of their views. He would just cut them off from information >> that was uh made available to the other governors and there was nothing they could do about it. >> So, I think a more decentralized central bank where we go back to the Federal Open Market Committee of 1913, you need obviously a couple more reserve banks in the West. We probably need two in California alone. uh and the Fed has the authority to reorganize themselves. The Congress gave them that power. So, you know, to me, it's just a question of a little distance politically between the central bank and Washington. Um and getting them out of Washington entirely, I think, would be very beneficial. >> Has the Fed been acting like its own hedge fund? >> Well, they experiment. They have done things like buying lots of securities during COVID and they did too much because they thought the purchases would somehow help the housing market for example. But in fact, just the opposite occurred. Housing prices soared and if they were to drop rates too much in the next year, which obviously is what President Trump wants, you'd see home prices go back up again. And this would fulfill the prediction of my friend Stan Middleman, which is that we're going to have a home price correction in 2027 or 28. Uh, and I I think that frankly is still a likely scenario, Julia. >> Mhm. Yeah. >> Prices are already weak this year. Nationally, on average, we're just going to be about zero in terms of home price appreciation. But if you goose this market a little bit and get volumes up next year, see home prices maybe go up a few percentage points in 2026, then you're really set for a significant correction afterwards. >> In other words, that would be a bad thing then. >> Well, it'll certainly help affordability. >> Well, I mean, I would like the correction selfishly, but I know. >> Yeah. >> But that's the thing. There are people who would welcome that and who would say fine I can finally get into the market and buy a house for my family. We used to have periods of inflation and deflation in the home price market in the 1970s for example. My parents bought a couple of homes in Washington when uh you know nobody wanted them. We fixed them up and rented them for a couple years and then we sold them. And Washington DC has always been that kind of market. It's seen hyperbolic price increases during certain periods. So, I think a little deflation is good, but the Fed is worried about that because they know that if you have significant price deflation in housing, you're probably going to have deflation in the bond market, too. So, they've wanted to avoid that. >> Hey there. I just want to take a quick moment to thank you for watching this video, and I would really love for you to subscribe to this channel if you like this content. Over 70% of our viewers are not yet subscribed, and we are on a mission to hit 100,000 subscribers. So, if you could just take a quick moment, hit subscribe. Thank you so much for your support. We appreciate you. And back to the video. On the Federal Reserve, we've now had three 25 basis point rate cuts, >> right? >> Yeah. Um, we have a 10ear that where is the tenure today? I don't even know. It's at 41. Yeah, 414. Um, >> it's gone up. That's the thing. The more Trump talks about interest rates, he talks about lowering the short-term rate for Fed funds. But meanwhile, the mortgage rates are going up and the tenure has actually gone up. So, I I think the White House ought to stop talking about interest rates because people are concerned about some of the rhetoric they hear from the White House. And I think Kevin Hasset's behavior of the past week, if you look at some of his statements, he is responding to that concern. Julia, that's what's so interesting. >> Wait, explain that real quick. >> Well, the bond market's a little worried that Donald Trump just wants to push rates down to help the midterm election next year, >> and he doesn't particularly worry about inflation or housing prices or whatever. I think that's there's a large measure of truth there. Uh so the people in the bond market are actually bidding up yields out of concern about what may lie ahead. >> Interesting. Okay. Um and so that rhetoric has just been extremely counterproductive. >> It seems not helpful. Yeah. >> Right. So if you could give some advice though to the administration on communicating about monetary policy, what would you say? >> I think the president ought to go out and talk about growth and jobs. Um those are two relatively benign issues that everybody warms to. Um there's a lot of positives on his side over the past year. The Democrat poll numbers are abysmal. They're at a low actually. So I think he should go out and play to his strengths. Having him talking about interest rates one way or another, you know, I don't think that's really helpful. Putting someone like Kevin Hassid, who's a great conservative, or Kevin Walsh, either one of them, uh is going to change the Fed and it's going to change policy. That's enough. Mhm. >> Make the decision. Let it sink in. You want to make the decision in such a way that Chairman Powell actually steps down and doesn't stick around until 2028, which he can. His term as governor doesn't end till January 28. Um, and this is just a little, you know, nuance that the Trump people seem to have missed. >> Interesting. Okay. So, Kevin Walsh, um, he's kind of the emerging front runner right now. what what strengths do you think he brings um to the table? How might his leadership be different, especially from PAL in addressing, you know, Fed independence um and policy transmission? >> If you look at his comments and writings, he's been very clear that he wants the Fed to refocus their mission uh and not be as willing to experiment. things like buying a lot of securities during 2020 2122 uh which resulted in inflation um the mission creep that the staff has tended to over the years because congress really can't supervise the central bank they don't have the knowledge as you pointed out earlier uh these are not technocrats or partisan politicians who have to run for office every two years so you know I think he would be a very conservative change and he he would make institutional changes at the Fed that we have not seen in a long time that would look a lot like that essay I wrote frankly. >> Yeah. And part of that too um from your essay you want to scrap the dual mandate and focus on the soundness of the currency. Um, >> well, the dual mandate was a a compromise in 1978. That's right. The Democrats wanted to guarantee everybody a job. >> Uh, and the Republicans said, "No, we'll we'll encourage uh job creation." That was how they struck it. But it's become a seessaw, Julia. There's no way to do both. You know, the the Fed is always running from one to the next, and it creates volatility >> in terms of the economy and the markets. So I think going back to a sound money prescription much like the Bundes Bank in Germany uh would be a welcome change. >> Yeah. Um I think yeah the seesaw is a good kind of metaphor for that and or analogy. >> It's a dangerous thing when you jump off the seesaw. >> Oh yeah it is. Um because also I think like they're just contradictory as well. U the mandate. >> It's not possible to do both and a lot of people have commented on this. Even Powell >> to his credit has talked about this over the past year. >> Before we get into like the sound um like getting back to like sound money, but real quick just um the the inflation print that we saw this week, the CPI, what do you make of it? Because I want to ask you because you wrote the book inflated. >> I think 3% is the new target. >> Okay. which is uh not good news for consumers because 3% inflation if you compound it every year is going to take away everybody's purchasing power in you know 15 years or less um I think the Fed has to be more aggressive in holding the line and let me give you an example when they raised the conforming limit for mortgages recently for Fanny May and Freddy Mack that just encourages more inflation that encourages people to buy more house and you know the industry likes it, but it's not going to help get home prices down. >> It's just the opposite. >> So, yeah, I guess everyone has just Yeah, you're right. It raises >> Huh. >> Oh, the homebuilders love it. >> Well, >> you know, it's all about sales in Washington, remember? >> Yeah. >> Can it ever really go back down like the >> Cuz wouldn't we just get used to it? Yeah. >> Yeah. I wouldn't raise it. I would force um buyers to make it work. And this would also put pressure on sellers to accommodate buyers. If you're constantly increasing the the limit for loans from Fanny May Freddy Mack, you're essentially saying, "Well, prices are going to go up x amount." They they raised it 3%. Uh I would have left it alone. >> That's a good point, too, because yeah, it's like what the incentive alignment there too. It's like, well, you can just go >> expectations, Julie. It's not just, you know, what happens in the market every day. >> If people see that, then they expect prices to go up. And let's be fair, >> do Americans who are selling a home worry about inflation? No. They love it. >> Yeah. >> It gives them a higher sale price. >> But in other parts of your life, you definitely don't love it. It's crazy. >> No. >> Yeah. >> No. >> Um, all right. So, getting back to like more sound money. Um I know you have been writing a lot about gold and I imagine gold plays a role in this. Can you elaborate a bit more on the thesis? >> Well, as if you look at the fact that interest rates, long-term interest rates have not been coming down, it correlates very much to what we've seen in the last couple months, which is silver galloping along. And gold has continued to do very well this year. There's periods when they retrench and kind of consolidate, but because central banks are out there buying gold as an alternative to dollars as a reserve asset, there's a kind of asymmetrical aspect to this trade which I think is unmistakable. Silver is different because silver is used in industry. There's a lot more volatility, but you also have a huge investor component that's been waiting for it to go up. You know, silver is classically the means of exchange for people in different societies, whereas gold has tended to be a much larger store of value. So, it's not used as much in money. But the fact that both are increasing so exponentially this year, I think kind of tells you that people are worried about what they see coming out of Washington in terms of debt and just the general tenor of the Trump administration. um they need to spend a little bit more time on sound money I think to you know to your question right >> like in DC they do um >> well it's not popular members of Congress pass continuing resolutions and they just increase everything every year >> right but do you think that it is viable to get to sound money >> I think you will always have a fiat currency as your means of exchange it essentially replace silver more than 100 years ago. Um, but I do think the the Treasury ought to be buying gold. We should be a seller of paper and a buyer of gold. Uh, Congress needs to allow Treasury to revalue our gold stocks and we should talk about it. We should use it as a benchmark to help our people understand where inflation is and we should encourage individuals to to own it. Mhm. >> In China, you can open a bank account for with a gram of physical gold. Why can't we do that for our people? >> Yeah. >> I think it would be helpful to roll back some of the worst excesses of the Roosevelt administration. And that includes you're not going to ever have a gold back currency 100%. But if people see that there's gold in the bank, they're going to have more confidence that we're going to pay our bills and that we're not just going to go down the rabbit hole of inflation. >> So, it sounds like um not to like go into like history, but I love talking about history with you and you are you write about you're a historian when it comes to economics, markets, and so many other topics. Roosevelt left us problems that we still have to this day, didn't he? >> Yes. Well, the the the New Deal was a failure in terms of reviving the US economy. O over time, the deflation slowed down, but it was really World War II and the vast amount of spending that occurred after the war which uh drove the recovery around the world. It's an interesting commentary. As Paul Vulkar said, we still can't quite generate enough growth, generate enough jobs to meet the needs and the the wants and needs of our people. So, you know, we're still kind of in that same position. If you look at the big countries today, the major industrial powers, they're all sitting there with too much debt that comes from people wanting more services than they can tax. And, you know, the the questions are unresolved. You're you're very right. And then again, going back to the precious metals, silver hit an all-time high this week. Gold is now north of 4,300, I think. Did it hit fresh highs? I don't I don't know. They've both been on a tear. It seems like what you were saying before, they're signaling um these issues that we've talked about on this channel. I take it a lot of folks are still underinvested in the precious metals as well. >> Oh, yes. >> So, we're still like, what do you say? Are we still like very much early endings then? >> I think we are. You're going to see corrections in both. I wouldn't be surprised to see a correction in silver. But at the same time, there's two things you just hit on. One is central bank buying. And two is imagine if Americans increase their allocation to gold and silver and some of the other metals, copper, uh nickel, all of these commodity metals are going to be in demand in the future and they have limited supply. So I I think that you know for me I've got 10% of my portfolio in gold and I'm actually increasing it >> uh because I think it's a it's an asymmetrical trade. >> It's really hard to make the short case right now whereas you know coins and things of that nature I think have kind of run their course >> and uh I would tell people be very careful of them >> like crypto you mean? Yeah. >> Yeah. I think you know it was driven by a crowd. when people are in a crowd, they don't make good decisions. But when people take losses, that's what tends to change uh sentiment. And that's been the case, you know, over the past couple of months. We've had people take some pretty significant losses in in not just Bitcoin, but a number of the other markets. >> All right, we have to talk about banking. um your newsletter um your newsletter institutional risk analyst. Hope everyone who watches this go subscribe um to the institutional risk analyst. >> Our our winter sale is almost over. >> Um you talk about the top money center banks and you also point out continued paying for commercial real estate. >> How bad is the commercial real estate situation really? Um and which banks are the most exposed? Well, the banks tend to have the most senior positions in these uh assets. They'll hold mortgages and things of that nature. Um, then you have a big bond market component. You also have Fanny, Freddy, and HUD uh providing financing to multifamily uh properties, trillions of dollars. By the way, the whole bank portfolio in multif family, for example, is only $600 billion. And it's been pretty stable over the past 40 years. it hasn't really increased very much. So even though more people live in apartments, even though you've seen big construction and commercial real estate for offices, uh mostly that's been financed in the capital markets, private REITs that are owned by developers, things like that. What I can tell you is that in the big cities, you're seeing significant markdowns, Julia, half of uh appraised value in in some cases, excuse me. And what that tells you is that the, you know, the use case for a lot of these properties has changed. They just can't fill the building up with workers. They're going to have to repurpose some of this property, too. You end up tearing down these buildings or trying to convert them. But what you can say is, you know, downtown Los Angeles, downtown New York, outside of the box, kind of uh, you know, the Environs down in the lower Manhattan area, these properties are going for a song. And I think what's going to happen is um the cities are going to have to do uh tax abatement and it's going to hurt their revenues over time. New properties are a different story. You know, new developments are still doing quite well. You have a lot of new capital going into new, but the gap between new and old is is growing, I would say. And until we figure out a way to repurpose these properties, I think it's going to continue. just some of the prints we've seen in the past couple weeks. I I mentioned them up on X. Um I would encourage people to take a look at The Real Deal, which is a great publication that covers commercial. Uh and just scroll through their headlines, look at some of the headlines, uh on these stories. Uh Bloomberg has also been covering this pretty extensively. So, you know, it's a it's an institutional story. These these data points don't often get up to the level where retail investors and just the general public see them because they're being resolved in the background. But, you know, banks have some exposure, but not as much as bond holders and other parties. >> And that's the quiet part of it. Um, >> yes, >> the silent part. You were on Bloomberg doing a podcast this week with Bloomberg. I think it was Bloomberg radio this week. Um, I was listening in the car. >> I can't remember exactly what you said, but you were talking about private credit. You were talking about um, NDFIS is kind of like the middleman of what's been going on in private credit between the banks. And then I I can't remember Chris, you said something that caught my attention was that the thing that was going to concern you was like, I think the banks were going to like look good or report good numbers or >> Oh, yeah. They're going to be great. >> Explain it though, like why it was concerning. I wish I could remember exactly what you said. We've changed the rules on accounting for restructured loans, for example. So, the numbers that banks are reporting are good, especially on the consumer side. They're not horrible on the commercial side, even though you know from reading the newspaper and reading the clips as we were just talking about, right, that there is pain out there. There's also a lot of forbearance, you know, in the same way that we have used forbearance to help consumers when they get into financial trouble. A lot of the banks just look at a big building and say, "Do I want that building? Do I want to take that to foreclosure?" The answer is no. So, they'll make concessions to the borrower. They'll lower the interest rate. They'll modify principal and stop charging interest on part of it just to keep the tenant in the building because they don't want to take it over. You know, if you take over a multif family apartment here in New York City, the city's going to make you take care of it. They're not going to let you abandon the asset and hand them the keys. So, that's what's going on here. It was so interesting. Uh, Zohar Mandami, the guy who's about to become mayor of New York, was saying how he's going to reopen the office of tenant protection or something and and you know, landlords who aren't taking care of their buildings are going to have their assets seized. Well, yeah, but the city doesn't have the money to take care of them either. Mhm. >> This whole this whole discussion is just politics and consumers are in in a lot of uh you know trouble. They are feeling the cost pressures of rent, of you know food, of everything in New York City. It's extremely expensive. >> Um but I think that's the context. It's inflation, Julia. That's what drives so many of these conversations today. >> The product of inflation. Chris, we have one question in the uh the viewer mailbag this week. Just for folks out there, please send your questions in. Um because Chris is so generous. Um and we don't we do not show the questions ahead of time. So, >> I don't know if you can answer this one. I'm sure you can. Chris, you can answer so many. Okay. Um well, this viewer writes, uh, "Having Mr. Well, they say, "Really enjoy your show. Having Mr. Whan every week now adds an element of continuity to your channel. Would you ask him about the impact of the BOJ raising rates being the prime funding currency for all kinds of risk assets, stocks, bonds, cryptos, would a rate hike in yen caused the long awaited correction in dot dot dot? Well, everything thinks >> well the you know your viewer is correct. The Japanese kept interest rates extremely low for a long time and they were basically using uh the country's savings which are considerable to finance a budget deficit. Again, this is an example of a country that cannot balance its uh the budget deficit on a a national basis. So when they raise rates, what they're doing is saying to people, uh, not only is that zero interest rate period over, but the government's cost of financing all of that debt, it's quite significant, uh, is going to go up, too. So for bond investors, the party's kind of over. Uh, and I think that's really the the significance I would put to it. If all of the major industrial countries, think about the top seven, had to pay higher interest rates on this on their debt, they'd all eventually have to restructure and to one degree or another default. And I think that's what people are worried about, Julia, in the back of their minds. >> All right, Chris, this has been another amazing episode of the rap. Before I let you go, parting thoughts for the audience. Anything that you'd like to leave them to think about? Anything you want to plug? Please, everyone, you have to subscribe to the IRA. Um, do that as a Christmas present to me, but the floor is all yours. >> Well, thank you, Julia. Um, we're going to be talking about some of our prognostications for the new year when we get together in two weeks. What I would tell people is that, you know, I think the markets are pretty stable at the moment. I don't see any great threat on the horizon, but at the same time, there's an awful lot going on in the background, which I do worry about. And I think that the potential for surprises, situations that people are just not expecting or names that they've never heard of, uh, is going to be increasing in the new year. So, that's the one caution I would put out there. Uh, you can find us, as you said, at the institutional risk analyst. Uh, I'm active on X and LinkedIn under RC Whan. And of course, uh, I write a column for National Mortgage News as well, which is great fun. And don't forget our sale for the institutional risk analyst premium service is over on New Year's Eve. So make sure you get it. >> I love it. Chris Whan, chairman of Whan Global Advisors, author of the institutional risk analyst. I really, really appreciate you. I love doing this with you. I hope you have a merry Christmas and I look forward to seeing you. >> Merry Christmas, Julia, the new year. Thanks, Chris. Thank you.
Chris Whalen: How To Really Reform The Fed
Summary
Transcript
I think the White House ought to stop talking about interest rates because people are concerned about some of the rhetoric they hear from the White House. And I think Kevin Hasset's behavior, he is responding to that concern. Julia, that's what's so interesting. Hey everyone, welcome back to another episode of the rap with Chris Whan, chairman of Whan Global Advisors, author of the institutional risk analyst blog, where we recap what's happening in markets and the economy every single week. Chris, great to see you as always. I love doing this with you. >> Yeah, likewise, Julia. Merry Christmas. >> Merry Christmas. The last one before the holidays here. Um >> That's right. >> Yeah. Um, and I know the audience has just been absolutely loving this. So, I'm grateful to everyone who's been tuning in week after week. All right, Chris, let's start with the Federal Reserve as our first topic. Specifically, who might be Fed Chair Kevin Hasset? We got to talk about Kevin Hasset because I know we have been discussing him. Do Do you think he blew his chances? >> Uh, you know, it's interesting. He's clearly been the favorite for a while. First and foremost, because he's close to the president. uh Fed chairman typically go through the White House, either the Council of Economic Advisors or the NEC or both. So, you know, if I thought this was a done deal to be honest with you, Julia, but then I saw him in the media this week kind of walking back some of the Trump conservative views on the Fed, saying that, you know, he'd listen to the president, but he was going to be data dependent and Trump wasn't going to tell him what to do because Hassid is beginning to do what all Fed chairman do, which is play to the history books. So, you know, you look at that and you say to yourself, hm, cuz if he continues in that vein, I think he's going to hurt his chances. And remember, there are two Kevins. And we have Kevin Worsh, who I love. I think Kevin Worsh would be a great chairman, breath of fresh air. Uh, he terrifies the Fed staff because they know that he would come in and, uh, make a lot of changes. That essay I just did in the international economy about reforming the Fed is very much I think attuned to the way Kevin Worsh looks at the place because what Franklin Roosevelt did in 1935 was turn it into a very European style authoritarian model and and really got away from the Jeffersonian uh decentralized model that Congress originally approved in 1913. You know, FDR did a lot of things under the rubric of crisis and emergency that would surprise many Americans. And I don't think people, for example, realize just how far-left Mariner Eckles and some of his fellow travelers were during the New Deal. These people were hardcore communists who had no, you know, care or or affection for uh small town America and the kind of limited government and and other basic uh you know, freedoms and foundations that you have. When you walk around uh Washington and you see these great uh Italian uh buildings with the eagles on top, that all comes from that period because you know FDR and all the leadership in the US essentially ran out of ideas. So they were borrowing statist ideas from Germany and Italy and even Russia during that period. >> Yeah. Chris, as you mentioned, your piece in the international economy, how to really reform the Fed, an irreverent take on the US history of money. It was an enjoyable read. I learned a lot a lot of history as you were just referencing there. Okay. So, you argue though for returning to a decentralized Fed. >> Yes. >> Uh with 15 district banks whose presidents are Senate confirmed, >> right? How would this actually change the Fed policy daytoday compared to what we have now? >> I think it would get the central bank a little bit out of the limelight politically if you physically get them out of Washington and have the chairmanship rotate among the different presidents around the country. You're going to, I think, provide a little bit of distance for the central bank. And the key recommendation I make in the essay is that the sole mandate for the Fed should be the soundness of the dollar. Uh we've got to get the Fed out of this economic management mode that has only really been the case since Roosevelt, which is kind of a a central planning uh function. I don't believe that the Fed does a particularly good job doing that. And I think, you know, given the amount of debt the country has and the other issues that we face, we need an anchor that is a voice for keeping the dollar as stable and as valuable as possible. Um because, you know, there's a couple of great quotes in there with uh my friend Alex Pollock who's at the Mises Institute. Alex was head of Chicago uh Federal Home Loan Bank for quite a a long period. He worked in the banking industry and he said something fascinating. He said, you know, the Fed must be independent of the president, but it cannot be independent of the Congress because ultimately it's a creature of the Congress. Uh, does the Congress understand what the Fed does? Probably not. I I can count on the fingers of two hands, uh, members of Congress who actually understand finance at all. Uh, but you know what I'm saying? From a structural point of view, you don't want the president telling the Fed what to do directly because he's the borrower. >> You know, the Fed is his banker. >> Uh but on the other hand, their power comes from Congress, the power to coin money directly from the Constitution. So, you can't have the central bank be independent of Congress. That's when they they get creative and and and start mission creep as they say, and that's not a good thing. >> Let me ask you this. as you point out um your friend Alex Pollock um you had some interviews with him and you referenced him in the piece that Treasury is the borrower and the Fed is the banker um and the two functions cannot be under the power of the president. I guess the question for you is >> does Congress also lack the technical expertise for monetary policy >> as it's conducted today? Yes, Julia, but I would like to change that. I think the Fed needs to do less. I think the Treasury is clearly uh the first among equals when it comes to financial policy for the United States. And there's certain things that the Fed should never do. They should never compete with the Treasury by issuing their own T bills, for example. That's what they did during CO. We have what what were called reverse repurchase agreements, which is essentially the Fed raising money in the short-term markets. They can't compete with the Treasury. That's one of the big problems. You know, people debate about whether the Fed should pay interest to banks on reserves, but that's something that they have to do today because the size of their balance sheet is so big. All of the instruments in the money market have to be roughly the same yield if you think of it. So whether it's a T bill issued by the Treasury or it's a instrument like a reserve deposit at the Fed, they have to keep them more or less the same because otherwise the whole system would tip over. uh you'd have banks running out of reserves and buying tea bills and then the next day would be bad. So, you know, that's why the Congress gave the Fed that power back in oh god it was more than a decade ago. >> So, also just going back into the piece and a bit more of history. So, post 1935 that power became concentrated. It wasn't just in Washington but it was with the Fed chair position. How has that I'm so curious about this like explaining this idea. How has that like distorted I guess that model has distorted monetary policy? What have been some of the ramifications we've seen because of that model? >> Well, the chairman is the chief executive of the agency and he runs the staff. So to the extent the staff um is really the ones making policy on a day-to-day basis and the governors are there essentially to give their ascent. The chairman drives policy very clearly. You know, you can remember the period with Alan Greenspan when people got out of line and he didn't like some of their views. He would just cut them off from information >> that was uh made available to the other governors and there was nothing they could do about it. >> So, I think a more decentralized central bank where we go back to the Federal Open Market Committee of 1913, you need obviously a couple more reserve banks in the West. We probably need two in California alone. uh and the Fed has the authority to reorganize themselves. The Congress gave them that power. So, you know, to me, it's just a question of a little distance politically between the central bank and Washington. Um and getting them out of Washington entirely, I think, would be very beneficial. >> Has the Fed been acting like its own hedge fund? >> Well, they experiment. They have done things like buying lots of securities during COVID and they did too much because they thought the purchases would somehow help the housing market for example. But in fact, just the opposite occurred. Housing prices soared and if they were to drop rates too much in the next year, which obviously is what President Trump wants, you'd see home prices go back up again. And this would fulfill the prediction of my friend Stan Middleman, which is that we're going to have a home price correction in 2027 or 28. Uh, and I I think that frankly is still a likely scenario, Julia. >> Mhm. Yeah. >> Prices are already weak this year. Nationally, on average, we're just going to be about zero in terms of home price appreciation. But if you goose this market a little bit and get volumes up next year, see home prices maybe go up a few percentage points in 2026, then you're really set for a significant correction afterwards. >> In other words, that would be a bad thing then. >> Well, it'll certainly help affordability. >> Well, I mean, I would like the correction selfishly, but I know. >> Yeah. >> But that's the thing. There are people who would welcome that and who would say fine I can finally get into the market and buy a house for my family. We used to have periods of inflation and deflation in the home price market in the 1970s for example. My parents bought a couple of homes in Washington when uh you know nobody wanted them. We fixed them up and rented them for a couple years and then we sold them. And Washington DC has always been that kind of market. It's seen hyperbolic price increases during certain periods. So, I think a little deflation is good, but the Fed is worried about that because they know that if you have significant price deflation in housing, you're probably going to have deflation in the bond market, too. So, they've wanted to avoid that. >> Hey there. I just want to take a quick moment to thank you for watching this video, and I would really love for you to subscribe to this channel if you like this content. Over 70% of our viewers are not yet subscribed, and we are on a mission to hit 100,000 subscribers. So, if you could just take a quick moment, hit subscribe. Thank you so much for your support. We appreciate you. And back to the video. On the Federal Reserve, we've now had three 25 basis point rate cuts, >> right? >> Yeah. Um, we have a 10ear that where is the tenure today? I don't even know. It's at 41. Yeah, 414. Um, >> it's gone up. That's the thing. The more Trump talks about interest rates, he talks about lowering the short-term rate for Fed funds. But meanwhile, the mortgage rates are going up and the tenure has actually gone up. So, I I think the White House ought to stop talking about interest rates because people are concerned about some of the rhetoric they hear from the White House. And I think Kevin Hasset's behavior of the past week, if you look at some of his statements, he is responding to that concern. Julia, that's what's so interesting. >> Wait, explain that real quick. >> Well, the bond market's a little worried that Donald Trump just wants to push rates down to help the midterm election next year, >> and he doesn't particularly worry about inflation or housing prices or whatever. I think that's there's a large measure of truth there. Uh so the people in the bond market are actually bidding up yields out of concern about what may lie ahead. >> Interesting. Okay. Um and so that rhetoric has just been extremely counterproductive. >> It seems not helpful. Yeah. >> Right. So if you could give some advice though to the administration on communicating about monetary policy, what would you say? >> I think the president ought to go out and talk about growth and jobs. Um those are two relatively benign issues that everybody warms to. Um there's a lot of positives on his side over the past year. The Democrat poll numbers are abysmal. They're at a low actually. So I think he should go out and play to his strengths. Having him talking about interest rates one way or another, you know, I don't think that's really helpful. Putting someone like Kevin Hassid, who's a great conservative, or Kevin Walsh, either one of them, uh is going to change the Fed and it's going to change policy. That's enough. Mhm. >> Make the decision. Let it sink in. You want to make the decision in such a way that Chairman Powell actually steps down and doesn't stick around until 2028, which he can. His term as governor doesn't end till January 28. Um, and this is just a little, you know, nuance that the Trump people seem to have missed. >> Interesting. Okay. So, Kevin Walsh, um, he's kind of the emerging front runner right now. what what strengths do you think he brings um to the table? How might his leadership be different, especially from PAL in addressing, you know, Fed independence um and policy transmission? >> If you look at his comments and writings, he's been very clear that he wants the Fed to refocus their mission uh and not be as willing to experiment. things like buying a lot of securities during 2020 2122 uh which resulted in inflation um the mission creep that the staff has tended to over the years because congress really can't supervise the central bank they don't have the knowledge as you pointed out earlier uh these are not technocrats or partisan politicians who have to run for office every two years so you know I think he would be a very conservative change and he he would make institutional changes at the Fed that we have not seen in a long time that would look a lot like that essay I wrote frankly. >> Yeah. And part of that too um from your essay you want to scrap the dual mandate and focus on the soundness of the currency. Um, >> well, the dual mandate was a a compromise in 1978. That's right. The Democrats wanted to guarantee everybody a job. >> Uh, and the Republicans said, "No, we'll we'll encourage uh job creation." That was how they struck it. But it's become a seessaw, Julia. There's no way to do both. You know, the the Fed is always running from one to the next, and it creates volatility >> in terms of the economy and the markets. So I think going back to a sound money prescription much like the Bundes Bank in Germany uh would be a welcome change. >> Yeah. Um I think yeah the seesaw is a good kind of metaphor for that and or analogy. >> It's a dangerous thing when you jump off the seesaw. >> Oh yeah it is. Um because also I think like they're just contradictory as well. U the mandate. >> It's not possible to do both and a lot of people have commented on this. Even Powell >> to his credit has talked about this over the past year. >> Before we get into like the sound um like getting back to like sound money, but real quick just um the the inflation print that we saw this week, the CPI, what do you make of it? Because I want to ask you because you wrote the book inflated. >> I think 3% is the new target. >> Okay. which is uh not good news for consumers because 3% inflation if you compound it every year is going to take away everybody's purchasing power in you know 15 years or less um I think the Fed has to be more aggressive in holding the line and let me give you an example when they raised the conforming limit for mortgages recently for Fanny May and Freddy Mack that just encourages more inflation that encourages people to buy more house and you know the industry likes it, but it's not going to help get home prices down. >> It's just the opposite. >> So, yeah, I guess everyone has just Yeah, you're right. It raises >> Huh. >> Oh, the homebuilders love it. >> Well, >> you know, it's all about sales in Washington, remember? >> Yeah. >> Can it ever really go back down like the >> Cuz wouldn't we just get used to it? Yeah. >> Yeah. I wouldn't raise it. I would force um buyers to make it work. And this would also put pressure on sellers to accommodate buyers. If you're constantly increasing the the limit for loans from Fanny May Freddy Mack, you're essentially saying, "Well, prices are going to go up x amount." They they raised it 3%. Uh I would have left it alone. >> That's a good point, too, because yeah, it's like what the incentive alignment there too. It's like, well, you can just go >> expectations, Julie. It's not just, you know, what happens in the market every day. >> If people see that, then they expect prices to go up. And let's be fair, >> do Americans who are selling a home worry about inflation? No. They love it. >> Yeah. >> It gives them a higher sale price. >> But in other parts of your life, you definitely don't love it. It's crazy. >> No. >> Yeah. >> No. >> Um, all right. So, getting back to like more sound money. Um I know you have been writing a lot about gold and I imagine gold plays a role in this. Can you elaborate a bit more on the thesis? >> Well, as if you look at the fact that interest rates, long-term interest rates have not been coming down, it correlates very much to what we've seen in the last couple months, which is silver galloping along. And gold has continued to do very well this year. There's periods when they retrench and kind of consolidate, but because central banks are out there buying gold as an alternative to dollars as a reserve asset, there's a kind of asymmetrical aspect to this trade which I think is unmistakable. Silver is different because silver is used in industry. There's a lot more volatility, but you also have a huge investor component that's been waiting for it to go up. You know, silver is classically the means of exchange for people in different societies, whereas gold has tended to be a much larger store of value. So, it's not used as much in money. But the fact that both are increasing so exponentially this year, I think kind of tells you that people are worried about what they see coming out of Washington in terms of debt and just the general tenor of the Trump administration. um they need to spend a little bit more time on sound money I think to you know to your question right >> like in DC they do um >> well it's not popular members of Congress pass continuing resolutions and they just increase everything every year >> right but do you think that it is viable to get to sound money >> I think you will always have a fiat currency as your means of exchange it essentially replace silver more than 100 years ago. Um, but I do think the the Treasury ought to be buying gold. We should be a seller of paper and a buyer of gold. Uh, Congress needs to allow Treasury to revalue our gold stocks and we should talk about it. We should use it as a benchmark to help our people understand where inflation is and we should encourage individuals to to own it. Mhm. >> In China, you can open a bank account for with a gram of physical gold. Why can't we do that for our people? >> Yeah. >> I think it would be helpful to roll back some of the worst excesses of the Roosevelt administration. And that includes you're not going to ever have a gold back currency 100%. But if people see that there's gold in the bank, they're going to have more confidence that we're going to pay our bills and that we're not just going to go down the rabbit hole of inflation. >> So, it sounds like um not to like go into like history, but I love talking about history with you and you are you write about you're a historian when it comes to economics, markets, and so many other topics. Roosevelt left us problems that we still have to this day, didn't he? >> Yes. Well, the the the New Deal was a failure in terms of reviving the US economy. O over time, the deflation slowed down, but it was really World War II and the vast amount of spending that occurred after the war which uh drove the recovery around the world. It's an interesting commentary. As Paul Vulkar said, we still can't quite generate enough growth, generate enough jobs to meet the needs and the the wants and needs of our people. So, you know, we're still kind of in that same position. If you look at the big countries today, the major industrial powers, they're all sitting there with too much debt that comes from people wanting more services than they can tax. And, you know, the the questions are unresolved. You're you're very right. And then again, going back to the precious metals, silver hit an all-time high this week. Gold is now north of 4,300, I think. Did it hit fresh highs? I don't I don't know. They've both been on a tear. It seems like what you were saying before, they're signaling um these issues that we've talked about on this channel. I take it a lot of folks are still underinvested in the precious metals as well. >> Oh, yes. >> So, we're still like, what do you say? Are we still like very much early endings then? >> I think we are. You're going to see corrections in both. I wouldn't be surprised to see a correction in silver. But at the same time, there's two things you just hit on. One is central bank buying. And two is imagine if Americans increase their allocation to gold and silver and some of the other metals, copper, uh nickel, all of these commodity metals are going to be in demand in the future and they have limited supply. So I I think that you know for me I've got 10% of my portfolio in gold and I'm actually increasing it >> uh because I think it's a it's an asymmetrical trade. >> It's really hard to make the short case right now whereas you know coins and things of that nature I think have kind of run their course >> and uh I would tell people be very careful of them >> like crypto you mean? Yeah. >> Yeah. I think you know it was driven by a crowd. when people are in a crowd, they don't make good decisions. But when people take losses, that's what tends to change uh sentiment. And that's been the case, you know, over the past couple of months. We've had people take some pretty significant losses in in not just Bitcoin, but a number of the other markets. >> All right, we have to talk about banking. um your newsletter um your newsletter institutional risk analyst. Hope everyone who watches this go subscribe um to the institutional risk analyst. >> Our our winter sale is almost over. >> Um you talk about the top money center banks and you also point out continued paying for commercial real estate. >> How bad is the commercial real estate situation really? Um and which banks are the most exposed? Well, the banks tend to have the most senior positions in these uh assets. They'll hold mortgages and things of that nature. Um, then you have a big bond market component. You also have Fanny, Freddy, and HUD uh providing financing to multifamily uh properties, trillions of dollars. By the way, the whole bank portfolio in multif family, for example, is only $600 billion. And it's been pretty stable over the past 40 years. it hasn't really increased very much. So even though more people live in apartments, even though you've seen big construction and commercial real estate for offices, uh mostly that's been financed in the capital markets, private REITs that are owned by developers, things like that. What I can tell you is that in the big cities, you're seeing significant markdowns, Julia, half of uh appraised value in in some cases, excuse me. And what that tells you is that the, you know, the use case for a lot of these properties has changed. They just can't fill the building up with workers. They're going to have to repurpose some of this property, too. You end up tearing down these buildings or trying to convert them. But what you can say is, you know, downtown Los Angeles, downtown New York, outside of the box, kind of uh, you know, the Environs down in the lower Manhattan area, these properties are going for a song. And I think what's going to happen is um the cities are going to have to do uh tax abatement and it's going to hurt their revenues over time. New properties are a different story. You know, new developments are still doing quite well. You have a lot of new capital going into new, but the gap between new and old is is growing, I would say. And until we figure out a way to repurpose these properties, I think it's going to continue. just some of the prints we've seen in the past couple weeks. I I mentioned them up on X. Um I would encourage people to take a look at The Real Deal, which is a great publication that covers commercial. Uh and just scroll through their headlines, look at some of the headlines, uh on these stories. Uh Bloomberg has also been covering this pretty extensively. So, you know, it's a it's an institutional story. These these data points don't often get up to the level where retail investors and just the general public see them because they're being resolved in the background. But, you know, banks have some exposure, but not as much as bond holders and other parties. >> And that's the quiet part of it. Um, >> yes, >> the silent part. You were on Bloomberg doing a podcast this week with Bloomberg. I think it was Bloomberg radio this week. Um, I was listening in the car. >> I can't remember exactly what you said, but you were talking about private credit. You were talking about um, NDFIS is kind of like the middleman of what's been going on in private credit between the banks. And then I I can't remember Chris, you said something that caught my attention was that the thing that was going to concern you was like, I think the banks were going to like look good or report good numbers or >> Oh, yeah. They're going to be great. >> Explain it though, like why it was concerning. I wish I could remember exactly what you said. We've changed the rules on accounting for restructured loans, for example. So, the numbers that banks are reporting are good, especially on the consumer side. They're not horrible on the commercial side, even though you know from reading the newspaper and reading the clips as we were just talking about, right, that there is pain out there. There's also a lot of forbearance, you know, in the same way that we have used forbearance to help consumers when they get into financial trouble. A lot of the banks just look at a big building and say, "Do I want that building? Do I want to take that to foreclosure?" The answer is no. So, they'll make concessions to the borrower. They'll lower the interest rate. They'll modify principal and stop charging interest on part of it just to keep the tenant in the building because they don't want to take it over. You know, if you take over a multif family apartment here in New York City, the city's going to make you take care of it. They're not going to let you abandon the asset and hand them the keys. So, that's what's going on here. It was so interesting. Uh, Zohar Mandami, the guy who's about to become mayor of New York, was saying how he's going to reopen the office of tenant protection or something and and you know, landlords who aren't taking care of their buildings are going to have their assets seized. Well, yeah, but the city doesn't have the money to take care of them either. Mhm. >> This whole this whole discussion is just politics and consumers are in in a lot of uh you know trouble. They are feeling the cost pressures of rent, of you know food, of everything in New York City. It's extremely expensive. >> Um but I think that's the context. It's inflation, Julia. That's what drives so many of these conversations today. >> The product of inflation. Chris, we have one question in the uh the viewer mailbag this week. Just for folks out there, please send your questions in. Um because Chris is so generous. Um and we don't we do not show the questions ahead of time. So, >> I don't know if you can answer this one. I'm sure you can. Chris, you can answer so many. Okay. Um well, this viewer writes, uh, "Having Mr. Well, they say, "Really enjoy your show. Having Mr. Whan every week now adds an element of continuity to your channel. Would you ask him about the impact of the BOJ raising rates being the prime funding currency for all kinds of risk assets, stocks, bonds, cryptos, would a rate hike in yen caused the long awaited correction in dot dot dot? Well, everything thinks >> well the you know your viewer is correct. The Japanese kept interest rates extremely low for a long time and they were basically using uh the country's savings which are considerable to finance a budget deficit. Again, this is an example of a country that cannot balance its uh the budget deficit on a a national basis. So when they raise rates, what they're doing is saying to people, uh, not only is that zero interest rate period over, but the government's cost of financing all of that debt, it's quite significant, uh, is going to go up, too. So for bond investors, the party's kind of over. Uh, and I think that's really the the significance I would put to it. If all of the major industrial countries, think about the top seven, had to pay higher interest rates on this on their debt, they'd all eventually have to restructure and to one degree or another default. And I think that's what people are worried about, Julia, in the back of their minds. >> All right, Chris, this has been another amazing episode of the rap. Before I let you go, parting thoughts for the audience. Anything that you'd like to leave them to think about? Anything you want to plug? Please, everyone, you have to subscribe to the IRA. Um, do that as a Christmas present to me, but the floor is all yours. >> Well, thank you, Julia. Um, we're going to be talking about some of our prognostications for the new year when we get together in two weeks. What I would tell people is that, you know, I think the markets are pretty stable at the moment. I don't see any great threat on the horizon, but at the same time, there's an awful lot going on in the background, which I do worry about. And I think that the potential for surprises, situations that people are just not expecting or names that they've never heard of, uh, is going to be increasing in the new year. So, that's the one caution I would put out there. Uh, you can find us, as you said, at the institutional risk analyst. Uh, I'm active on X and LinkedIn under RC Whan. And of course, uh, I write a column for National Mortgage News as well, which is great fun. And don't forget our sale for the institutional risk analyst premium service is over on New Year's Eve. So make sure you get it. >> I love it. Chris Whan, chairman of Whan Global Advisors, author of the institutional risk analyst. I really, really appreciate you. I love doing this with you. I hope you have a merry Christmas and I look forward to seeing you. >> Merry Christmas, Julia, the new year. Thanks, Chris. Thank you.