Chris Whalen: Why Double-Digit Inflation Is Possible, 30-Year Tops 5%
Summary
In this episode of The Wrap, Chris Whalen breaks down Kevin Warsh’s confirmation as Fed chair and explains why this represents …
Transcript
Uh, I think we're going to have higher inflation this year because of the war with Iran. It this is not something that you can just flick a switch and magically fix overnight, Julia. So, I I think that unfortunately, you know, it's going to be very difficult for anybody at the Fed to be talking about lower interest rates simply because the inflation numbers are going to be higher. We could get up to double digits by the end of this year because of fuel costs and other knock-on effects from the war. Hey everyone, welcome back to this week's episode of the rap with Chris Whan where we break down what's happening on Wall Street, Washington DC, and everywhere in between. Chris, great to see you. >> Likewise. I see you, Julia. >> Well, what a week it's already been. Um the latest edition of the rap silver soarses Worsh confirmed and the 30-year bond tops 5%. Let's dive right in. I think we should start with Washington DC just given everything that's happening. Kevin Walsh at the Fed. He's now confirmed. He passed the Senate confirmation. You say he'll push for a smaller balance sheet and use that tightening his leverage to get the FOMC to cut short-term rates. Um, and as a supply cider who's called QE reverse Robin Hood, um, he's someone who thinks the Fed should worry about distributional consequences. How do you see him actually changing Fed models, staffing policy over the next 12 to 18 months? Well, first you got to remember that, you know, since the 1930s, the chairman of the Fed in Washington DC has been the chief executive officer of the agency. He does not share authority with the other governors. So, he can make uh changes any way he wants. Uh you may recall years ago, this probably before you were born, um Ellen Greenspan got annoyed at the governor and he just stopped giving him the briefing package. they had to sit in their office and you know watch the sunshine. So Fed chairman have enormous power and I think he will make changes in how they model interest rates. I think they will make changes to how they understand the economy. They will probably look at market factors more than the model culture at the Fed. Uh you got to remember most economists today are model builders. They sit there and build models and comment on one another's models. They rarely focus on the real world. So, I think you're going to see some pretty dramatic changes in how they manage the agency. And in particular, um I expect him to try and reduce the size of the balance sheet. They've been talking about this for a while. And in return, remember when you reduce reserves, which is what we're talking about, that's tightening. So, I think he's going to try and trade off a smaller balance sheet, a less reserve availability with lower rates. He's going to say to the other governors, we are going back to a pre208 regime where we had scarce reserves. We're going to let banks hold treasuries. We're going to let them use the discount window if they need to. And we're going to count all of that towards their liquidity requirements. But we are not going to just dump liquidity into the street, which is frankly what the Bernanki Yellen Powell Fed was all about. I think it's important to remind our our viewers again, you know, we've talked about this in the past, but the Fed is the cornerstone of the progressive left uh you know, infrastructure in Washington. The Fed as we know it today was created by Mariner Eckles in the 1930s who was a diehard socialist from Utah and it was meant to be a central planning agency. That's what it evolved into when when FDR sees gold from Americans in the 1930s. The Federal Reserve was the first agency to come and help them even before the law was passed. So, this is a a socialist statist institution. And Kevin Worsh is a supply cider. He's a lot like my old boss Jack Kemp. And I think that, you know, yeha, this is going to be good for the country. It's going to be good for the markets. Uh banks are no longer going to be able to earn income simply by parking liquidity in reserves at the Fed. Uh so I think there'll be a lot of changes. It'll be gradual. Won't happen overnight. Um, but you know, he's there for a good long while and I think that you're going to be really surprised at some of the changes that Wars makes. The economist profession are are going to be up in arms. They're going to be apoplelectic >> because, you know, most economists can't even talk about the Fed balance sheet. They don't understand it. But it's the most important part of monetary policy today. Why? Because of the federal debt. The balance sheet at the Fed grows proportionally with the federal debt. >> Well, we got a yee-haw from you already. So, I take it you're excited for Kevin Marsh Fed. Good for the markets, >> good for the country. >> I take it though, Chris. They're going to be some winners and losers. >> Who are those going to? >> No, I don't think so. I think that, you know, the regime that was put in place after the great financial crisis was a regime that was driven by fear. uh every time the market hiccup the Fed ran in and dumped more reserves into the market, particularly after 2020 with COVID, they went big. They bought 7 trillion worth of securities. And what that means is that the banking system grew proportionally because when the Fed buys a security from a bank, they are creating a new deposit. You know, in the first quarter of this year, bank assets grew 8%. Does that sound like inflation is low? Think about that on an annualized basis. We're talking about a doubledigit growth rate for US bank assets. What that means is that they have a lot of money to put to work, but they got no place to put it and they force up asset prices. Why are we lending the private credit? Why are we fueling the the, you know, the mania and AI uh build out? It's because banks have nothing better to do with the money. Mhm. Do you think that we might see a reversal of that? Like we've talked about like feeling this bubble mania, if you will. Do you think we'll get back to like more >> if we lower the level of reserves in the system, bank deposits are going to grow more slowly. It's a it's a mechanistic link. Uh the Fed is totally geared to what the Treasury is doing in the marketplace. I often like to tell people that the Fed is the tail, the Treasury is the doggy. And when the Treasury is out raising $800 billion every couple of months, that impacts the markets a lot. So yes, I think you would have a more boring marketplace and, you know, stock prices might not go up as much because again, you know, orthodox economists would tell you that there's no connection between bank reserves and the stock market, but I think that's clearly not true. I think that there is a bleed through because banks have to go out and finance assets. End of story. Otherwise, they're going to go out of business. You know, the biggest activity by banks last quarter was buying back their own stock. They actually bought back more stock than they made money. So, think about that. They're they're giving back their capital because they don't need it. >> Yeah. Um you also mentioned like in the rap that line from Worsh who's talked about um QE as reverse Robin Hood as well because you know I think the markets have I guess if you're an asset holder you probably liked the impacts um well some of the impacts of QE do you think uh yeah >> I think that's the polite version because let's be fair why did we do QE we in 2020 when COVID had exploded on the scene, it was to bail out the treasury. You know, we can sit there and say that it helped uh consumers, it helped the mortgage market certainly. Uh you had a boom in lending, you had a lot of liquidity, the stock market went up, but the major beneficiaries were investors. >> Yes. >> Not consumers. And I think that's what Worsh is is saying. He's been very consistent with his comments about the Fed. When the price of gold and silver was rising faster and faster by the day, people kept asking if they've missed the boat. They thought that gold and silver were too expensive. Well, if you were looking for lower prices, here they are. And they might not last very long. That's why I'm still a buyer of precious metals and why I encourage you to get your free information kit from our partners over at Goldco. They're the number one gold and silver company in the country. They have over 8,000 five-star reviews. Plus, they have the best gold and silver offer in the business, hands down. And right now, they are offering a 10% bonus in gold or silver on qualified orders. Go to goldco.com/therap to learn more. Or you can call 855-573817. Go to goldco.com/therap. or call 855-573817 to learn more. Another topic in the the this week's edition of the rap, the 30-year bond topping 5%. The long bond hit 5% for the first time since the global financial crisis and markets are pricing in higher for longer under Wor. Um, you've been warning about inflation. Um, I guess are we Yeah. Where are we where where do you see things headed on the rate front and inflation? >> Uh, I think we're going to have higher inflation this year because of the war with Iran. I spoke to our friend John Daisard yesterday and he reminded me that somebody in the White House or in the Department of Energy ought to be planning rationing uh strategies for certain key uh materials, byproducts from the petroleum refining process that we do not have in adequate supply. Uh high-end lubricants for example for gas turbines and jet engines, things like that. uh the Europeans have started to reverse their green strategies and they're now willing to use uh US style jet fuel. So I I think before much longer you're going to be hearing uh from the Trump administration, they obviously don't want to talk about this, but there are going to be actual shortages as a result of uh the war. You know where do you get for example synthetic oil that a lot of engines automobiles and trucks use today? You get that from the Persian Gulf. That's where they produce this stuff. So you know the world optimized around getting their supplies from the lowcost producer which was the the Gulf nations. And now that that supply has been disrupted it this is not something that you can just flick a switch and magically fix overnight. Julia, in order to start producing these products here in the United States, you would have to make some pretty significant investments, uh, you would, for example, have to stop exporting light crude and retain it for making fuel and other products. And you would have to invest a lot in refining capacity to handle that task. So, I I think that unfortunately, you know, it's going to be very difficult for anybody at the Fed to be talking about lower interest rates simply because the inflation numbers are going to be higher. We could get up to double digits by the end of this year because of fuel costs and other knock-on effects from the war. >> Think about that. How do you think Americans would react before the midterm election if uh President Trump had to announce rationing for certain key uh materials that come out of the petroleum uh refining process? >> I think that would be the midterms would be cooked then. Yeah. Like >> Yeah. Well, that's why they're not talking about it. >> Yeah. Oh, man. Um yeah. Uh just um let's go a little bit further on the 30-year uh topping 5% for the first time since 2007. What do you make of that move? Is that like a a canary in the coal mine, a warning on the real economy? What do you make of it? >> Well, the whole long end of the Treasury curve has been going up. Uh the 10-year, which is actually more important for the economy, is around 4 and a half. Uh and I think long-term rates could be higher for longer even if the Fed were to drop short-term rates tomorrow. Um the long end probably would go up because of inflation fears. So you know markets have to price inflation in to what they are doing and interest rates are a reflection of inflation. So you know my sense is that's just a beginning. We could easily get the long end of the curve up closer to six and the five. Okay, another area of uh Washington. Well, it's regarding Washington but out of the country. Um Trump meeting with Xiinping in Beijing this week. Talked about tech, trade, um the war in Iran. Okay. Um how big of a deal was this meeting this week? Any near-term breakthroughs for you? What were you watching? >> I I think they had to meet. I'm not sure there's anything earth shaking. Uh Zinping is worried about a lot of things. You remember we talked about the fact that they had stopped exporting sulfuric acid. They're worried about fertilizer and being able to feed their people next season. So, you know, both of these leaders are in difficult positions and they don't need to be in conflict. That was essentially what Zehinping said to Trump when he said that we must work together and we can't mess this up. So I think, you know, it's it's a nice photo op. I'm not sure anything earth shaking is going to come out of this, but it's important for these two countries to have uh open communication and to try and avoid missteps that could lead to uh you know more serious consequences. Other than that, they didn't have a real big agenda going into this meeting, Julia. So, I think it was something that both men had to do and now they're going to go back to what they're doing. >> It's a consequential relationship. I think uh Xi called it Yeah. Xi called it the world's most consequential as you point out in thisition. >> Clearly. >> Yeah. All right. We got to move back to markets here because the Dow hitting 50,000. Um yeah, what what's your assessment right now? your take of just action we've seen in markets a lot of excitement around AI that continues um final blow up here or blowoff top for the trade or still runway >> keep calling for you know these apocalyptic scenarios and I think what's happening here is that you've had a big rotation out of some of the sectors that did really well last year financials for example uh people have kind of abandoned them we put out a note uh today about America enterprise which was one of the highest valued banks in our our group our top 100 that we maintain and you know it's been really just left by the wayside simply because people think that AI is going to replace everybody in the world of finance that's not true but it doesn't matter you know the the crowd is motivated by short-term factors they don't care what the reality is you see this more and more you You could have a stock that has great fundamentals like America prize uh and it doesn't matter. Everybody sells that and they go off and buy tech. So people are chasing the spend in AI. They're not chasing profitability. They're not chasing long-term uh efficacy of these models. They just see a lot of money being spent. And this kind of goes back to something you and I talked about last week. Nvidia had been the darling when it came to AI, but now you're seeing other semiconductor stocks, people like Cisco, uh AMD, which I own, all benefiting because the spend is so big that one company can't possibly take advantage of it all. There's going to be enough pie for everybody. And so I think managers sensingness are piling in. And remember, half of this market is passive >> as the stocks go up%. >> Yeah. The ETFs just pull it up faster. So, you have to remember that there's a kind of reflexive aspect to this and eventually it'll sell off and it'll sell off a lot. But in the meantime, nobody's arguing with it. And I just think it's part and parcel of what's going on. You know, stocks have always been a a reflection of inflation. So when inflation expectations go up, stocks go up because where else are people going to go? Real estate. >> Yeah. You know, that's kind of like an interesting thing too because talk about the K-shaped economy. If you own assets, you probably don't mind the inflation so much. It's been okay. Uh especially if you've done well. Yeah. And then it's like you have the affordability challenge crisis here in the US. It's still persistent with that that K shape like uh what was it the headline came out last week is like consumer sentiment at pretty much all-time lows. So >> yeah. >> Well, there was an interesting report from Urban Institute in Washington talking about how tough affordability is in New York City, but the bottom half of New Yorkers who probably can't afford to live in that city really, if you looked at it in a in an unvarnished sort of way, are they benefiting from the stock market? Most of them probably don't have any investments. They work at, you know, jobs. They go to work every morning, work hard, come home, and have to try and figure out how to survive when the purchasing power of their money is declining. >> So, there are people who win through inflation, and there are people who don't. Uh, I just, as you know, I sold our house in New York. We doubled our money in 5 years. That doesn't tell you that inflation is low. That tells you that this marketplace is constrained. You don't have enough new home building in the blue states like New York. And so people are forced to bid up the existing assets in order to get a place to live. >> That to me is the problem. We, you know, having a supply cider like Kevin Worsh at the Fed, I think will be a breath of fresh air because everybody in Washington, whether they're Republicans or Democrats, have been drinking from the Neocanesian fountain now for a long time. and there's just no new ideas. So, it may take a little bit of leadership and maybe breaking a few eggs to try and inject some new ideas into policy in Washington when it comes to the economy. >> Yeah. Um, we could use some of that for sure. All right. We have to talk about some precious metals, too. We have to talk about silver because you point out silver surging. >> Um, yeah. What's going on? >> What is going on with silver and why is it jumping like it is? What's the story? >> There's a couple of things going on. The Chinese were huge buyers of physical silver in the first quarter. Why? Because of their tech industry. Uh there are a lot of new developments in silver particularly solid state batteries which require a lot more silver content than your typical uh uh lithium battery. There are other things going on in tech as well. So you know between the impact of the war which is reducing the amount of mining derivative mining of silver which comes from uh producing other uh uh commodities and the big Chinese purchases these new developments in tech. To me it tells uh us that uh silver is going to be on a run for a while. I've been adding to my silver positions. You know, gold's been kind of going sideways. I think there have been some people taking profits because again, it was an amazing year last year. Uh, but silver is not a monetary story. It's a commodity story. It's a technology story. So, when you see AI screaming, when you see all of these stocks that are connected to tech screaming, that's why silver is going up. It's really the same trade. And to me, it's not going to end anytime soon because the availability of silver compared to the industrial demand is just not adequate. Uh and the mines that are being created today, they don't have the same uh yield that you saw in the past. >> Yeah. All right, Chris. Um moving beyond the rap, I want to talk about a few things you wrote this week in the institutional risk analyst. Um you had a piece, I think it's your most read one this year. Correct me if I'm wrong on that. >> Um, a little bit of drama going on in, uh, it's non-bank drama happening in the mortgage world. Um, >> you had a piece around United Wholesale Mortgage. Is it the next countrywide? >> Yeah. Um, United Wholesale Mortgage is the biggest non-bank lender in the country. They've got about 40% market share in what's called the broker channel. Uh, they're very significant player. They've been trying to buy a REIT called Two Harbors and they got into a bit of a bidding contest with another company, private company called Cross Country Mortgage. I think Cross Country is going to win this battle. Uh United Wholesale just doesn't have the cash and as we wrote in the blog, it's it's publicly available on the website. Uh the stock of United Wholesale is just not that attractive. It's trading below $4 and you know there's a lot of uh shares off market that could come onto the market soon. So I think you know what this illustrates is that rising interest rates Julia are having a really tough impact on the entire mortgage sector. They were all betting on lower interest rates. They were all betting on 5% mortgages and that's not going to happen. So everybody's out there fighting for assets, fighting for liquidity. Uh, I think United Wholesale, which is based in Detroit, really wanted to acquire two harbors because they have a couple hundred billion dollars worth of servicing assets and that's uh really what they wanted. But ultimately, I don't think they're going to win this one. There's a shareholder meeting on Monday and uh I think ultimately Two Harbors is going to go to cross country. um probably a good outcome for the two harbor shareholders, but it just to me it illustrates that, you know, higher for longer in terms of interest rates is going to force consolidation in the mortgage industry. But yeah, we got quite a reaction to that piece. We had 5,000 readers in the first day. >> Wow. >> So that that's a lot for us. >> Okay. Can you clarify what you mean though? like with your headline, who is the next countrywide financial penny penny rocket and United Wholesale Mortgage, like what what do you mean? >> Well, I I wrote, you know, it's United Wholesale like um Countrywide. They're very aggressive. They pay too much for loans in the secondary market, which means they're losing money. And how do they make up that? They sell servicing assets. They incur debt. They do other things to keep it going because they were hoping and expecting the rates would fall and they could use that amazing uh funnel that uh Matt Ishba, the CEO of United Wholesale has built. He's got the best uh tool out there for acquiring mortgages. He he's got the lowest cost, but when volumes are low, there isn't a whole lot they can do. And that's really where I think they are. So, you know, it's it's fascinating. I spent a lot of time in the mortgage industry. It's quite an opaque industry for consumers and analysts because it's it's not easy to follow what they're doing. But for those of uh you know, our uh our viewers that are interested, they should read that piece because I tried to lay it out in pretty simple terms. >> Yeah. And we do have an offer for folks if you want to subscribe to the institutional risk analyst that is linked in the show notes. Um so you can get all of Chris's writing. And you're right, you do cover the mortgage industry and that's why it's it's so interesting. Okay. What's the endgame though if it seems like the base case is higher for longer, especially with a a I'm taking with a worshled >> Fed as well, right? >> Well, he may not be able to get a majority to cut rates this year. So, in that event, I think you're going to see a lot more consolidation. You're going to see smaller mortgage firms forced to sell. uh you're going to see mortgage firms that have servicing books have to sell them just to raise cash and you know it's a tough thing to see but I think if you go back to what we talked about earlier Julia you know the great financial crisis and all that we've had relatively low interest rates for this 15-year period and we may have to get used to having interest rates for home mortgages for example in the sixes and the sevens instead of in the fours and the fives and that's a huge huge change. This industry, you know, toolled up during COVID, they hired 50% more people and they don't want to fire them, right? They want to keep that capacity. But if you're going to be in a environment like this, you almost are forced to downsize in a brutal kind of fashion because otherwise you're not going to survive. >> Yeah. You know, people will like write in and tell me and like guess even like my parents, they got their their like a mortgage in the 80s like when rate I mean what I don't know what rates were in the early 80s, but they were high. I know they're double digits. Um >> double digits. That's right. >> Yeah. So I mean >> I guess if your house is going to double in value every five or six or seven years, paying 6% or 7% isn't that much. >> See, this is the interesting thing about home price inflation. Uh, I think in many markets around the country where you have more supply than demand, prices are falling. We're actually having a correction right now. But in blue states where you don't have a lot of new construction, prices haven't gone down. And that's why people are yelling about affordability. But what do you do? How can you address this issue other than having a terrible recession, right? The big reset, push the red button. Uh, but I don't think that's going to happen. >> Yeah. Well, those those blue states might need to rethink their policies then, you know. >> Well, eventually they will when enough of us move down here to Florida. >> Well, I'm just glad I know they're coming to North Carolina. I'm glad I bought my house before they all come down and push the prices back up. But anyway, >> Oh, they are. Carolina is a very popular destination right now, Julia. >> Yeah. Well, if you go Well, the Rangers aren't very good at hockey right now, but if you go to a Rangers game where the Canes play, it feels like you're in MSG with a number of fans. So, >> Oh, I know. >> All right, we have some viewer mail. Marty wants to know, "With the national debt closing in on 40 trillion and still not yet reflecting any concerns in the markets, at whi which point do you see the national debt and the unfunded liabilities and promises actually having a serious negative impact on the markets specifically the bond markets and the overall economy?" >> Well, two things. Uh I think in that scenario, stocks go up because of inflation. uh and interest rates go up too which will be bad for the economy. So that's a trade-off. People keep trying to predict these apocalyptic scenarios for the US economy. But what I wrote about in my book, you know, is it it it's about inflation. Inflation is a core part of the US economy. And the rest of the world doesn't care because they like using our money as a means of exchange. You can finance things in dollars that you cannot finance in other currencies. So people keep saying, "Oh, well, you know, people are going to abandon the dollar." Where are they going to go to finance trade? Are they going to pay for everything in gold? No. Are they going to buy Bitcoin? No. Uh so I think you know what you have to understand is that this game is going to continue. Congress is going to be under a lot of pressure to deal with fiscal issues because people keep, you know, going on and on about how unsustainable it is, but it continues, doesn't it? >> Mhm. All right. And Mr. Vegas wants to know, "Will treat inflation resulting from the Iran war, fuel, food inputs, etc. as a self-correcting external event that doesn't require a Fed response? Because if that inflation is baked into the cake for 2026, it would seem to indicate a Fed funds hike, not a cut. If Worsh's first move as Fed chair was an increase, the White House reaction would be worse than anything Trump ever said about Powell. What do you think, Chris? >> Uh, I agree with the viewer. Uh, I don't think Kevin Worsh is going to raise interest rates. what he'll do is start reducing reserves and he'll point to that and say we're tightening. Um and and that is in fact the case. But I don't think you know think of it this way. We've talked about this before. If you were to int increase interest rates in an attempt to moderate inflation, which is caused by an external factor, it's not a monetary factor. It's caused by oil prices and prices for other energy. that's only going to go for so long and then the Congress is going to start screaming about the economy and the Fed's going to be forced to cut interest rates. So there's a political aspect to this too. The Fed can fight inflation until the Congress objects and then you know everything changes. I don't think Wars is going to go there. It is clearly an external factor. It's not a monetary factor. You know Milton Friedman said inflation is always and everywhere a monetary phenomenon, right? But no, wars cause inflation, too. >> Chris, um before I let you go, um what are you going to be watching next week? >> Well, bond market obviously with interest rates. Uh this AI run is going to run out of steam at some point. Uh I'm going to be buying more silver to be honest with you. I I've been working on my portfolio for the past couple days and you know there's certain things out there that are cheap that I'm looking at but we'll be talking about this in the in the blog for our premium subscribers. Every once in a while I show them my portfolio. So we got to do a little work. >> Chris Whan, chairman of Whan Global Advisors, author of the institutional risk analyst and multiple books including inflated which we will link in the show notes. Thank you so much for being so generous with your time, your knowledge, all of your wisdom, helping us all learn and get better every single week. And I also want to thank our partners over at Gold Co. You can head over to goldco.com/larrap to get your free 2026 gold and silver kit or you can give them a call at the following number 855-573817. Thank you so much everyone and that's a wrap. We will see you next Saturday. Thank you, Julia.
Chris Whalen: Why Double-Digit Inflation Is Possible, 30-Year Tops 5%
Summary
In this episode of The Wrap, Chris Whalen breaks down Kevin Warsh’s confirmation as Fed chair and explains why this represents …Transcript
Uh, I think we're going to have higher inflation this year because of the war with Iran. It this is not something that you can just flick a switch and magically fix overnight, Julia. So, I I think that unfortunately, you know, it's going to be very difficult for anybody at the Fed to be talking about lower interest rates simply because the inflation numbers are going to be higher. We could get up to double digits by the end of this year because of fuel costs and other knock-on effects from the war. Hey everyone, welcome back to this week's episode of the rap with Chris Whan where we break down what's happening on Wall Street, Washington DC, and everywhere in between. Chris, great to see you. >> Likewise. I see you, Julia. >> Well, what a week it's already been. Um the latest edition of the rap silver soarses Worsh confirmed and the 30-year bond tops 5%. Let's dive right in. I think we should start with Washington DC just given everything that's happening. Kevin Walsh at the Fed. He's now confirmed. He passed the Senate confirmation. You say he'll push for a smaller balance sheet and use that tightening his leverage to get the FOMC to cut short-term rates. Um, and as a supply cider who's called QE reverse Robin Hood, um, he's someone who thinks the Fed should worry about distributional consequences. How do you see him actually changing Fed models, staffing policy over the next 12 to 18 months? Well, first you got to remember that, you know, since the 1930s, the chairman of the Fed in Washington DC has been the chief executive officer of the agency. He does not share authority with the other governors. So, he can make uh changes any way he wants. Uh you may recall years ago, this probably before you were born, um Ellen Greenspan got annoyed at the governor and he just stopped giving him the briefing package. they had to sit in their office and you know watch the sunshine. So Fed chairman have enormous power and I think he will make changes in how they model interest rates. I think they will make changes to how they understand the economy. They will probably look at market factors more than the model culture at the Fed. Uh you got to remember most economists today are model builders. They sit there and build models and comment on one another's models. They rarely focus on the real world. So, I think you're going to see some pretty dramatic changes in how they manage the agency. And in particular, um I expect him to try and reduce the size of the balance sheet. They've been talking about this for a while. And in return, remember when you reduce reserves, which is what we're talking about, that's tightening. So, I think he's going to try and trade off a smaller balance sheet, a less reserve availability with lower rates. He's going to say to the other governors, we are going back to a pre208 regime where we had scarce reserves. We're going to let banks hold treasuries. We're going to let them use the discount window if they need to. And we're going to count all of that towards their liquidity requirements. But we are not going to just dump liquidity into the street, which is frankly what the Bernanki Yellen Powell Fed was all about. I think it's important to remind our our viewers again, you know, we've talked about this in the past, but the Fed is the cornerstone of the progressive left uh you know, infrastructure in Washington. The Fed as we know it today was created by Mariner Eckles in the 1930s who was a diehard socialist from Utah and it was meant to be a central planning agency. That's what it evolved into when when FDR sees gold from Americans in the 1930s. The Federal Reserve was the first agency to come and help them even before the law was passed. So, this is a a socialist statist institution. And Kevin Worsh is a supply cider. He's a lot like my old boss Jack Kemp. And I think that, you know, yeha, this is going to be good for the country. It's going to be good for the markets. Uh banks are no longer going to be able to earn income simply by parking liquidity in reserves at the Fed. Uh so I think there'll be a lot of changes. It'll be gradual. Won't happen overnight. Um, but you know, he's there for a good long while and I think that you're going to be really surprised at some of the changes that Wars makes. The economist profession are are going to be up in arms. They're going to be apoplelectic >> because, you know, most economists can't even talk about the Fed balance sheet. They don't understand it. But it's the most important part of monetary policy today. Why? Because of the federal debt. The balance sheet at the Fed grows proportionally with the federal debt. >> Well, we got a yee-haw from you already. So, I take it you're excited for Kevin Marsh Fed. Good for the markets, >> good for the country. >> I take it though, Chris. They're going to be some winners and losers. >> Who are those going to? >> No, I don't think so. I think that, you know, the regime that was put in place after the great financial crisis was a regime that was driven by fear. uh every time the market hiccup the Fed ran in and dumped more reserves into the market, particularly after 2020 with COVID, they went big. They bought 7 trillion worth of securities. And what that means is that the banking system grew proportionally because when the Fed buys a security from a bank, they are creating a new deposit. You know, in the first quarter of this year, bank assets grew 8%. Does that sound like inflation is low? Think about that on an annualized basis. We're talking about a doubledigit growth rate for US bank assets. What that means is that they have a lot of money to put to work, but they got no place to put it and they force up asset prices. Why are we lending the private credit? Why are we fueling the the, you know, the mania and AI uh build out? It's because banks have nothing better to do with the money. Mhm. Do you think that we might see a reversal of that? Like we've talked about like feeling this bubble mania, if you will. Do you think we'll get back to like more >> if we lower the level of reserves in the system, bank deposits are going to grow more slowly. It's a it's a mechanistic link. Uh the Fed is totally geared to what the Treasury is doing in the marketplace. I often like to tell people that the Fed is the tail, the Treasury is the doggy. And when the Treasury is out raising $800 billion every couple of months, that impacts the markets a lot. So yes, I think you would have a more boring marketplace and, you know, stock prices might not go up as much because again, you know, orthodox economists would tell you that there's no connection between bank reserves and the stock market, but I think that's clearly not true. I think that there is a bleed through because banks have to go out and finance assets. End of story. Otherwise, they're going to go out of business. You know, the biggest activity by banks last quarter was buying back their own stock. They actually bought back more stock than they made money. So, think about that. They're they're giving back their capital because they don't need it. >> Yeah. Um you also mentioned like in the rap that line from Worsh who's talked about um QE as reverse Robin Hood as well because you know I think the markets have I guess if you're an asset holder you probably liked the impacts um well some of the impacts of QE do you think uh yeah >> I think that's the polite version because let's be fair why did we do QE we in 2020 when COVID had exploded on the scene, it was to bail out the treasury. You know, we can sit there and say that it helped uh consumers, it helped the mortgage market certainly. Uh you had a boom in lending, you had a lot of liquidity, the stock market went up, but the major beneficiaries were investors. >> Yes. >> Not consumers. And I think that's what Worsh is is saying. He's been very consistent with his comments about the Fed. When the price of gold and silver was rising faster and faster by the day, people kept asking if they've missed the boat. They thought that gold and silver were too expensive. Well, if you were looking for lower prices, here they are. And they might not last very long. That's why I'm still a buyer of precious metals and why I encourage you to get your free information kit from our partners over at Goldco. They're the number one gold and silver company in the country. They have over 8,000 five-star reviews. Plus, they have the best gold and silver offer in the business, hands down. And right now, they are offering a 10% bonus in gold or silver on qualified orders. Go to goldco.com/therap to learn more. Or you can call 855-573817. Go to goldco.com/therap. or call 855-573817 to learn more. Another topic in the the this week's edition of the rap, the 30-year bond topping 5%. The long bond hit 5% for the first time since the global financial crisis and markets are pricing in higher for longer under Wor. Um, you've been warning about inflation. Um, I guess are we Yeah. Where are we where where do you see things headed on the rate front and inflation? >> Uh, I think we're going to have higher inflation this year because of the war with Iran. I spoke to our friend John Daisard yesterday and he reminded me that somebody in the White House or in the Department of Energy ought to be planning rationing uh strategies for certain key uh materials, byproducts from the petroleum refining process that we do not have in adequate supply. Uh high-end lubricants for example for gas turbines and jet engines, things like that. uh the Europeans have started to reverse their green strategies and they're now willing to use uh US style jet fuel. So I I think before much longer you're going to be hearing uh from the Trump administration, they obviously don't want to talk about this, but there are going to be actual shortages as a result of uh the war. You know where do you get for example synthetic oil that a lot of engines automobiles and trucks use today? You get that from the Persian Gulf. That's where they produce this stuff. So you know the world optimized around getting their supplies from the lowcost producer which was the the Gulf nations. And now that that supply has been disrupted it this is not something that you can just flick a switch and magically fix overnight. Julia, in order to start producing these products here in the United States, you would have to make some pretty significant investments, uh, you would, for example, have to stop exporting light crude and retain it for making fuel and other products. And you would have to invest a lot in refining capacity to handle that task. So, I I think that unfortunately, you know, it's going to be very difficult for anybody at the Fed to be talking about lower interest rates simply because the inflation numbers are going to be higher. We could get up to double digits by the end of this year because of fuel costs and other knock-on effects from the war. >> Think about that. How do you think Americans would react before the midterm election if uh President Trump had to announce rationing for certain key uh materials that come out of the petroleum uh refining process? >> I think that would be the midterms would be cooked then. Yeah. Like >> Yeah. Well, that's why they're not talking about it. >> Yeah. Oh, man. Um yeah. Uh just um let's go a little bit further on the 30-year uh topping 5% for the first time since 2007. What do you make of that move? Is that like a a canary in the coal mine, a warning on the real economy? What do you make of it? >> Well, the whole long end of the Treasury curve has been going up. Uh the 10-year, which is actually more important for the economy, is around 4 and a half. Uh and I think long-term rates could be higher for longer even if the Fed were to drop short-term rates tomorrow. Um the long end probably would go up because of inflation fears. So you know markets have to price inflation in to what they are doing and interest rates are a reflection of inflation. So you know my sense is that's just a beginning. We could easily get the long end of the curve up closer to six and the five. Okay, another area of uh Washington. Well, it's regarding Washington but out of the country. Um Trump meeting with Xiinping in Beijing this week. Talked about tech, trade, um the war in Iran. Okay. Um how big of a deal was this meeting this week? Any near-term breakthroughs for you? What were you watching? >> I I think they had to meet. I'm not sure there's anything earth shaking. Uh Zinping is worried about a lot of things. You remember we talked about the fact that they had stopped exporting sulfuric acid. They're worried about fertilizer and being able to feed their people next season. So, you know, both of these leaders are in difficult positions and they don't need to be in conflict. That was essentially what Zehinping said to Trump when he said that we must work together and we can't mess this up. So I think, you know, it's it's a nice photo op. I'm not sure anything earth shaking is going to come out of this, but it's important for these two countries to have uh open communication and to try and avoid missteps that could lead to uh you know more serious consequences. Other than that, they didn't have a real big agenda going into this meeting, Julia. So, I think it was something that both men had to do and now they're going to go back to what they're doing. >> It's a consequential relationship. I think uh Xi called it Yeah. Xi called it the world's most consequential as you point out in thisition. >> Clearly. >> Yeah. All right. We got to move back to markets here because the Dow hitting 50,000. Um yeah, what what's your assessment right now? your take of just action we've seen in markets a lot of excitement around AI that continues um final blow up here or blowoff top for the trade or still runway >> keep calling for you know these apocalyptic scenarios and I think what's happening here is that you've had a big rotation out of some of the sectors that did really well last year financials for example uh people have kind of abandoned them we put out a note uh today about America enterprise which was one of the highest valued banks in our our group our top 100 that we maintain and you know it's been really just left by the wayside simply because people think that AI is going to replace everybody in the world of finance that's not true but it doesn't matter you know the the crowd is motivated by short-term factors they don't care what the reality is you see this more and more you You could have a stock that has great fundamentals like America prize uh and it doesn't matter. Everybody sells that and they go off and buy tech. So people are chasing the spend in AI. They're not chasing profitability. They're not chasing long-term uh efficacy of these models. They just see a lot of money being spent. And this kind of goes back to something you and I talked about last week. Nvidia had been the darling when it came to AI, but now you're seeing other semiconductor stocks, people like Cisco, uh AMD, which I own, all benefiting because the spend is so big that one company can't possibly take advantage of it all. There's going to be enough pie for everybody. And so I think managers sensingness are piling in. And remember, half of this market is passive >> as the stocks go up%. >> Yeah. The ETFs just pull it up faster. So, you have to remember that there's a kind of reflexive aspect to this and eventually it'll sell off and it'll sell off a lot. But in the meantime, nobody's arguing with it. And I just think it's part and parcel of what's going on. You know, stocks have always been a a reflection of inflation. So when inflation expectations go up, stocks go up because where else are people going to go? Real estate. >> Yeah. You know, that's kind of like an interesting thing too because talk about the K-shaped economy. If you own assets, you probably don't mind the inflation so much. It's been okay. Uh especially if you've done well. Yeah. And then it's like you have the affordability challenge crisis here in the US. It's still persistent with that that K shape like uh what was it the headline came out last week is like consumer sentiment at pretty much all-time lows. So >> yeah. >> Well, there was an interesting report from Urban Institute in Washington talking about how tough affordability is in New York City, but the bottom half of New Yorkers who probably can't afford to live in that city really, if you looked at it in a in an unvarnished sort of way, are they benefiting from the stock market? Most of them probably don't have any investments. They work at, you know, jobs. They go to work every morning, work hard, come home, and have to try and figure out how to survive when the purchasing power of their money is declining. >> So, there are people who win through inflation, and there are people who don't. Uh, I just, as you know, I sold our house in New York. We doubled our money in 5 years. That doesn't tell you that inflation is low. That tells you that this marketplace is constrained. You don't have enough new home building in the blue states like New York. And so people are forced to bid up the existing assets in order to get a place to live. >> That to me is the problem. We, you know, having a supply cider like Kevin Worsh at the Fed, I think will be a breath of fresh air because everybody in Washington, whether they're Republicans or Democrats, have been drinking from the Neocanesian fountain now for a long time. and there's just no new ideas. So, it may take a little bit of leadership and maybe breaking a few eggs to try and inject some new ideas into policy in Washington when it comes to the economy. >> Yeah. Um, we could use some of that for sure. All right. We have to talk about some precious metals, too. We have to talk about silver because you point out silver surging. >> Um, yeah. What's going on? >> What is going on with silver and why is it jumping like it is? What's the story? >> There's a couple of things going on. The Chinese were huge buyers of physical silver in the first quarter. Why? Because of their tech industry. Uh there are a lot of new developments in silver particularly solid state batteries which require a lot more silver content than your typical uh uh lithium battery. There are other things going on in tech as well. So you know between the impact of the war which is reducing the amount of mining derivative mining of silver which comes from uh producing other uh uh commodities and the big Chinese purchases these new developments in tech. To me it tells uh us that uh silver is going to be on a run for a while. I've been adding to my silver positions. You know, gold's been kind of going sideways. I think there have been some people taking profits because again, it was an amazing year last year. Uh, but silver is not a monetary story. It's a commodity story. It's a technology story. So, when you see AI screaming, when you see all of these stocks that are connected to tech screaming, that's why silver is going up. It's really the same trade. And to me, it's not going to end anytime soon because the availability of silver compared to the industrial demand is just not adequate. Uh and the mines that are being created today, they don't have the same uh yield that you saw in the past. >> Yeah. All right, Chris. Um moving beyond the rap, I want to talk about a few things you wrote this week in the institutional risk analyst. Um you had a piece, I think it's your most read one this year. Correct me if I'm wrong on that. >> Um, a little bit of drama going on in, uh, it's non-bank drama happening in the mortgage world. Um, >> you had a piece around United Wholesale Mortgage. Is it the next countrywide? >> Yeah. Um, United Wholesale Mortgage is the biggest non-bank lender in the country. They've got about 40% market share in what's called the broker channel. Uh, they're very significant player. They've been trying to buy a REIT called Two Harbors and they got into a bit of a bidding contest with another company, private company called Cross Country Mortgage. I think Cross Country is going to win this battle. Uh United Wholesale just doesn't have the cash and as we wrote in the blog, it's it's publicly available on the website. Uh the stock of United Wholesale is just not that attractive. It's trading below $4 and you know there's a lot of uh shares off market that could come onto the market soon. So I think you know what this illustrates is that rising interest rates Julia are having a really tough impact on the entire mortgage sector. They were all betting on lower interest rates. They were all betting on 5% mortgages and that's not going to happen. So everybody's out there fighting for assets, fighting for liquidity. Uh, I think United Wholesale, which is based in Detroit, really wanted to acquire two harbors because they have a couple hundred billion dollars worth of servicing assets and that's uh really what they wanted. But ultimately, I don't think they're going to win this one. There's a shareholder meeting on Monday and uh I think ultimately Two Harbors is going to go to cross country. um probably a good outcome for the two harbor shareholders, but it just to me it illustrates that, you know, higher for longer in terms of interest rates is going to force consolidation in the mortgage industry. But yeah, we got quite a reaction to that piece. We had 5,000 readers in the first day. >> Wow. >> So that that's a lot for us. >> Okay. Can you clarify what you mean though? like with your headline, who is the next countrywide financial penny penny rocket and United Wholesale Mortgage, like what what do you mean? >> Well, I I wrote, you know, it's United Wholesale like um Countrywide. They're very aggressive. They pay too much for loans in the secondary market, which means they're losing money. And how do they make up that? They sell servicing assets. They incur debt. They do other things to keep it going because they were hoping and expecting the rates would fall and they could use that amazing uh funnel that uh Matt Ishba, the CEO of United Wholesale has built. He's got the best uh tool out there for acquiring mortgages. He he's got the lowest cost, but when volumes are low, there isn't a whole lot they can do. And that's really where I think they are. So, you know, it's it's fascinating. I spent a lot of time in the mortgage industry. It's quite an opaque industry for consumers and analysts because it's it's not easy to follow what they're doing. But for those of uh you know, our uh our viewers that are interested, they should read that piece because I tried to lay it out in pretty simple terms. >> Yeah. And we do have an offer for folks if you want to subscribe to the institutional risk analyst that is linked in the show notes. Um so you can get all of Chris's writing. And you're right, you do cover the mortgage industry and that's why it's it's so interesting. Okay. What's the endgame though if it seems like the base case is higher for longer, especially with a a I'm taking with a worshled >> Fed as well, right? >> Well, he may not be able to get a majority to cut rates this year. So, in that event, I think you're going to see a lot more consolidation. You're going to see smaller mortgage firms forced to sell. uh you're going to see mortgage firms that have servicing books have to sell them just to raise cash and you know it's a tough thing to see but I think if you go back to what we talked about earlier Julia you know the great financial crisis and all that we've had relatively low interest rates for this 15-year period and we may have to get used to having interest rates for home mortgages for example in the sixes and the sevens instead of in the fours and the fives and that's a huge huge change. This industry, you know, toolled up during COVID, they hired 50% more people and they don't want to fire them, right? They want to keep that capacity. But if you're going to be in a environment like this, you almost are forced to downsize in a brutal kind of fashion because otherwise you're not going to survive. >> Yeah. You know, people will like write in and tell me and like guess even like my parents, they got their their like a mortgage in the 80s like when rate I mean what I don't know what rates were in the early 80s, but they were high. I know they're double digits. Um >> double digits. That's right. >> Yeah. So I mean >> I guess if your house is going to double in value every five or six or seven years, paying 6% or 7% isn't that much. >> See, this is the interesting thing about home price inflation. Uh, I think in many markets around the country where you have more supply than demand, prices are falling. We're actually having a correction right now. But in blue states where you don't have a lot of new construction, prices haven't gone down. And that's why people are yelling about affordability. But what do you do? How can you address this issue other than having a terrible recession, right? The big reset, push the red button. Uh, but I don't think that's going to happen. >> Yeah. Well, those those blue states might need to rethink their policies then, you know. >> Well, eventually they will when enough of us move down here to Florida. >> Well, I'm just glad I know they're coming to North Carolina. I'm glad I bought my house before they all come down and push the prices back up. But anyway, >> Oh, they are. Carolina is a very popular destination right now, Julia. >> Yeah. Well, if you go Well, the Rangers aren't very good at hockey right now, but if you go to a Rangers game where the Canes play, it feels like you're in MSG with a number of fans. So, >> Oh, I know. >> All right, we have some viewer mail. Marty wants to know, "With the national debt closing in on 40 trillion and still not yet reflecting any concerns in the markets, at whi which point do you see the national debt and the unfunded liabilities and promises actually having a serious negative impact on the markets specifically the bond markets and the overall economy?" >> Well, two things. Uh I think in that scenario, stocks go up because of inflation. uh and interest rates go up too which will be bad for the economy. So that's a trade-off. People keep trying to predict these apocalyptic scenarios for the US economy. But what I wrote about in my book, you know, is it it it's about inflation. Inflation is a core part of the US economy. And the rest of the world doesn't care because they like using our money as a means of exchange. You can finance things in dollars that you cannot finance in other currencies. So people keep saying, "Oh, well, you know, people are going to abandon the dollar." Where are they going to go to finance trade? Are they going to pay for everything in gold? No. Are they going to buy Bitcoin? No. Uh so I think you know what you have to understand is that this game is going to continue. Congress is going to be under a lot of pressure to deal with fiscal issues because people keep, you know, going on and on about how unsustainable it is, but it continues, doesn't it? >> Mhm. All right. And Mr. Vegas wants to know, "Will treat inflation resulting from the Iran war, fuel, food inputs, etc. as a self-correcting external event that doesn't require a Fed response? Because if that inflation is baked into the cake for 2026, it would seem to indicate a Fed funds hike, not a cut. If Worsh's first move as Fed chair was an increase, the White House reaction would be worse than anything Trump ever said about Powell. What do you think, Chris? >> Uh, I agree with the viewer. Uh, I don't think Kevin Worsh is going to raise interest rates. what he'll do is start reducing reserves and he'll point to that and say we're tightening. Um and and that is in fact the case. But I don't think you know think of it this way. We've talked about this before. If you were to int increase interest rates in an attempt to moderate inflation, which is caused by an external factor, it's not a monetary factor. It's caused by oil prices and prices for other energy. that's only going to go for so long and then the Congress is going to start screaming about the economy and the Fed's going to be forced to cut interest rates. So there's a political aspect to this too. The Fed can fight inflation until the Congress objects and then you know everything changes. I don't think Wars is going to go there. It is clearly an external factor. It's not a monetary factor. You know Milton Friedman said inflation is always and everywhere a monetary phenomenon, right? But no, wars cause inflation, too. >> Chris, um before I let you go, um what are you going to be watching next week? >> Well, bond market obviously with interest rates. Uh this AI run is going to run out of steam at some point. Uh I'm going to be buying more silver to be honest with you. I I've been working on my portfolio for the past couple days and you know there's certain things out there that are cheap that I'm looking at but we'll be talking about this in the in the blog for our premium subscribers. Every once in a while I show them my portfolio. So we got to do a little work. >> Chris Whan, chairman of Whan Global Advisors, author of the institutional risk analyst and multiple books including inflated which we will link in the show notes. Thank you so much for being so generous with your time, your knowledge, all of your wisdom, helping us all learn and get better every single week. And I also want to thank our partners over at Gold Co. You can head over to goldco.com/larrap to get your free 2026 gold and silver kit or you can give them a call at the following number 855-573817. Thank you so much everyone and that's a wrap. We will see you next Saturday. Thank you, Julia.