Chris Whalen: No Fed Consensus, Home Prices Falling & The Hidden Risk For 2026
Summary
Chris Whalen, chairman of Whalen Global Advisors and author of The Institutional Risk Analyst blog, joins The Julia La Roche …
Transcript
Most of this is about economics. It's about inflation. Inflation is the most important issue for most Americans right now. They see the bills coming in. They see that the numbers are higher and their wages and their income are not keeping pace with the rate of inflation. This is the first time that this has really been the case in 50 years. Welcome back to this week's episode of the rap with Chris Whan where we are joined by Whan Global Advisors chairman, author of the institutional risk analyst blog, author of multiple books and the very best independent analyst that you will find on Wall Street, friend of the show. It is so wonderful to see you again, Chris. Really appreciate you. >> Well, a pleasure. Likewise. >> Okay, there's been a lot happening this week. Um let's start with the FOMC. Um we saw our third rate cut, another 25 basis points. Some other things in the release I want to get to as well in the statement, but let's start there. More of your reaction. >> Well, there's no consensus on the Fed. Uh there are a number of members of the committee who would have done nothing. Uh they got a majority to support a quarter point cut. I think they will probably do nothing uh in the next meeting simply because the stated goal of the committee is one cut next year and one cut in 27 so they get short-term rates down to about 3%. I think that's a good objective. Uh that means that mortgage rates hopefully are going to settle down into the kind of high to mid 5% range which will be good for the industry. I don't think we should be more aggressive than that uh in contrast to what President Trump has been asking for because you don't want home prices to spike upward. Uh the whole point I think of policy should be to try and settle down the housing market from what happened during COVID. You know, the Fed dropped rates to zero. We had record issuance and then of course people went out and bought a lot of houses whether they needed them or not. And that saw home prices on average in the United States go up 50% in less than five years. That's why affordability is the big political issue that it is today in this country. So to me the the interesting thing about the Fed, Julia, is it it they don't really have a clear consensus as they normally do because you have Steve Mirren uh who is agitating for more rate cuts. They want to try and help the Republican fortunes in uh next year's midterm election. I think frankly that President Trump has already cooked the Republicans and he's going to be facing impeachment proceedings uh right after the election. So there you are. >> Wow, that's a bold prediction. Okay. Well, we're heading to 2026. >> I mean, come on. Do you Do you think the Republicans would win the midterms right now? >> Okay. No. No. But Okay. What? you think he'll get impeached? >> Oh, the Democrats, if they control the House, >> that they will they will vote for impeachment and then the Senate will ignore it. Uh but my point is is that the politics have shifted dramatically since Trump won the election. He has alienated a lot of constituencies that supported him and his victory. Uh so, you know, you sit down and do the math. Uh they're trying to redistrict uh states like Texas. They tried in Indiana. The Republicans in Indiana said no. So, you know, it's a mixed bag for the Republicans right now, and they're going to have to try and do something to reposition themselves for next year's midterms. >> It seems like there'll just be a lot of uh swinging back and forth. Yeah. And who's Yeah. And who's really going to solve our problems, but uh Yeah. So, you don't see a Sorry, not to make it a political show. Well, they're going to get so mad at me in the comments, but you don't see a way to rectify this? >> No. Listen, most of this is about economics. It's about inflation. Inflation is the most important issue for most Americans right now. They see the bills coming in. They see that the numbers are higher and their wages and their income are not keeping pace with the rate of inflation. This is the first time that this has really been the case in 50 years. going back to Gerald Ford, remember the wind whip inflation now buttons? You weren't even born then. >> I do know about these buttons. The wind buttons, >> but you know, it it's become topic A for many Americans. And that's why if the Republicans are not responsive to that issue, then they've got to go out and focus on other issues, focus on negatives. You know, they can talk about Zohar Mandami in New York City and his socialist agenda. But the reason you see so many Democrats turning to an explicitly socialist agenda is simply because of inflation and affordability. >> And you mentioned again afford affordability. I feel like that's just been the buzzword of late. Um >> Oh, it is. But we're going to have a home price correction. We're going to end up being right on that one. >> Yeah. I wanted to ask you about that because um even this week we did see like um I think it was the CNBC had a headline of home prices decline for the first time in two years albeit fractionally. But I wonder is that like a taste of what's to come. >> It's it the average price is what they're talking about in the headlines. Markets are still very local, Julia. Every market is different. That's true. So, here in New York, home prices are holding up much better than I had anticipated because there's no new construction, very little. Um, especially for single family homes in and around New York City. On the other hand, you have a lot of supply down south as you and I have discussed. That supply is waiting for rates to come down. That's one of the reasons President Trump has been talking about interest rates. But on the other hand, the thing that you don't see in the headlines a lot is commercial real estate. We talked in the note uh you know today about a couple of very interesting situations. One in Los Angeles, one in New York where you have assets going for a third of what the appraised value was 5 years ago. >> Wow. >> Now these are big office buildings. The use case for the office building is no longer what it used to be. The one in New York is on Second Avenue just above the United Nations. That's a residential neighborhood. You don't need an office building there. Especially given what's going on in New York City today in terms of the business community. Uh we've seen JP Morgan finished their headquarters on Park Avenue. All of the landlords of buildings that Jaime Diamond had been renting for his people are kind of walking on eggshells right now because they're not sure at the end of the day if their buildings are going to be fortunate enough to get new leases or if Morgan is going to move out. >> There aren't a lot of big tenants like JP Morgan that can take up a whole building on Park Avenue above Grand Central Station. So that's, you know, that's the uh the issue really is I think the hot spot in real estate right now is not residential, but it's it's commercial >> commercial side. All right. Let me ask you um before we move off of the Fed, the Fed announced um reserve management per purchases, reserve management purposes to maintain the ample supply of reserves and let the balance sheet grow. The question I have is why do you think this is happening now? And why isn't this just QE but under a different name? >> Well, they they are starting to purchase securities for the balance sheet, but they're only buying Treasury securities. They're not going to buy mortgages. The mortgage portfolio is going to continue to run off. And indeed, as rates fall, the prepayments on those mortgage back securities that the Fed has been sitting on for several years now are going to accelerate. So, it's going to help them fix that problem. Is this the start of quantitative easing again? No. Well, I think it goes back to really before CO when the Fed wanted the portfolio to track what the Treasury was issuing in the market in terms of maturity and continue to grow along with the economy and obviously along with the federal debt. You know, the Treasury just raised $600 billion last week uh in order to keep their cash pile at the Fed where it needs to be to make payments. So the eb and flow of the treasury's cash, the reserve balances that you just mentioned and also the banking system and and how their positions look are very very important to how the Fed at least tries to manage the overall liquidity situation in the market. They are airing on the side of more liquidity as opposed to less because of what we talked about earlier. Pressures in the money market. >> Yeah. About the repo market. Yeah. In the >> That's right. And so far so good. We haven't seen any additional stress like we saw last month. And part of the reason that they announced what they did is simply to make sure that there's a little bit extra money out there in the street so that they don't have problems as we go in the year end because you know here it is. We're almost the middle of December. Most banks are going to close their books and tell their people not to take any more risk until we get into January. So I think that's part of the uh the script and the Fed is you know as I say they are trying to manage things in a way that avoids problems. They don't want a repeat of 2018. >> That makes me wonder though they're like what do they see? Are they just trying to get out in front of something? Because it seems like the market kind of cheered it on. Um >> right. So >> they don't see is the problem. the models that they have are not really useful in terms of informing the members of the board of governors or which is the the group that decides the Fed's balance sheet and and you know so they have to kind of guess they have models that look at liquidity as a percent of GDP which to me is completely useless. The other issue of course Julia is that liquidity is not continuous. You could have banks that are providing liquidity to the market. You can have other banks that have folded their arms and said, "No, we're fine. We'll talk to you in January." That has happened in the past. So there are pockets of the markets that are tighter than others and the liquidity, it's not like water. It doesn't just flow everywhere evenly. It gets compartmentalized. It can be very inefficient at times. And the Fed is cognizant of this. They know that they don't have visibility into liquidity really. It's very hard to measure. So, they're airing on the side of uh too much as opposed to too little. >> 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. The other headline I have to bring up with you this week, especially because you are known as a bank analyst, JP Morgan's Maryanne Lake, who now runs the consumer bank, she was the CFO several years ago. That's why it was interesting to me. Uh made some comments at a conference about how JP Morgan expects 105 billion in expenses next year, which was above well above I think was four billion above consensus. >> So um >> that was quite curious to me. Um what did you make of it? >> Well, what Maryann Lake did was pre-announce um earnings for next year. In other words, she felt the need to inform analysts and investors that their view of the world had changed and that they expected their expenses to be higher. Everybody in that conference at Goldman Sachs was rather surprised to hear this because you know Maryanne is a very respected lady on Wall Street, very, you know, good financial professional and yet she had to make this announcement because as a representative of the bank, which is a large public company, uh when things change, especially when their guidance has changed, uh they have to let people know. >> So that was essentially a pre-release. uh and she didn't take a lot of questions. A lot of people were surprised. What I would tell you is is that the folks at JP Morgan are no different than the Fed in terms of having perfect information and perfect visibility over what's going on in their business. Um but I'm not that worried about their expenses. I'm much more worried about JP Morgan's lending to uh nondepository financial institutions and funds. I think that's where the risk is for next year. >> Okay. So, let's stay on this one and then I want to get into the um the non-depository financial institutions lending. But but just on JP Morgan, we can't read into it like a bell whether that the other banks might have similar issues around the expenses or I don't know maybe you're the guy. >> That's the fear. That's why people reacted the way they did in the markets. I don't think so. JP Morgan, you know what Marian Lake said is this is related to growth. Okay? In other words, we are growing our business in certain areas and our view of expenses has changed so that we expect the numbers to be $4 billion higher than we thought it was going to be in 26. That's a significant number. It's, you know, on a hundred billion baseline, that's a 4% increase, which we did not expect. So, that's why analysts, I think, were a little bit taken aback. Mhm. >> Uh but does it imply that other banks are going to have similar pressures? I don't know. It's hard to say. Personnel costs are really the big toggle for most banks. They have been able to hold the line on other expenses, what we call non-interest expenses of banks. So I I wouldn't say that you're going to see a big uptick in expenses for banks next year. And in fact, credit costs are probably going to remain low. So uh I'm expecting higher earnings for the industry next year. >> Okay. So, higher earnings for the banking industry next year. All right, let's talk about the NDFIS, non-depository financial institutions, because you mentioned JP Morgan funding loans to NDFIS. Um, that it's reminiscent of the 1920s rollover practices. I know you as a historian of economics and markets. Take us back. Draw the parallel that you see. Um, explain it for us. Well, there's been slack demand in most business lines for banks when it comes to loans. The one area that has been galloping along are non-bank financial institutions. Why is this? Well, after 2008, we put a lot of restrictions and uh cautionary rules in place to prevent banks from doing what they did before the great financial crisis. So, what did they do? They lend money to non-banks and they let them go out and make silly decisions in terms of credit. One of the big areas I worry about is private equity. About 15 to 20% of all private equity companies in this country are basically insolvent. They can't pay their debt and they've been giving people more shares or they've been acrewing more principle on on debt because they don't have the cash to pay it. Now what happens in that case is that eventually the private equity manager is going to go out to the limited partners and say hey we need cash. We have to recapitalize this company. The LPs may say no. They may say well I'm not throwing more good money after bad. Uh why why should I do that? Then the private equity manager will turn to the bank because they have a credit line with the bank. They'll borrow money to try and fix the situation, but the bank doesn't have recourse to the private equity manager. Most of them wave recourse. What does that mean? It means that if the loan goes bad, the private equity company that's losing money gets seized by the bank and the bank's going to try and sell it. Now, that is an ugly situation because you know what'll happen. and they'll try and go out into the market and get whatever for this company and they won't get very strong bids. So I see a a deflationary risk facing the US banking industry coming both from private equity and private credit. These big non-banks, the Apollos and the Aries and the Brookfields and the rest of them have been just pumping this sector up relentlessly over the past several years and I think the banks have a lot of risk here. So it's something we're going to watch next year very closely. Okay, wait a second. Okay, so just to elaborate a bit more that it could be deflationary. Can you just kind of explain it for us? Help us understand how >> the risk that you see, how you see it playing out, what are the scenarios that you see? Well, you know, if you have a company that has been privately funded by a private equity firm and the company's not making money and they can't uh perform on their debts, at some point the private equity fund is going to have to pull the plug and liquidate the company. You're already starting to see this in cases where they have pulled on a bank line to try and buy some time and and hopefully get the company right side up so they're no longer losing money. If that turns out to not work, then the bank is going to own the the the portfolio company of the private equity firm. And that's where you could see some forced sales, forced liquidations of assets, of shareholdings. You know, imagine if a bank ends up taking 20% of a a private equities uh firm's portfolio company and they go out into the market and trying to sell it for whatever they can get. That's the kind of scenario I worry about. Uh same thing with private credit. You have an awful lot of uh structures out there that have been sold to retail investors or that fund uh pension funds and annuities. That could be a mess as well because if it turns out that those investments have gone bad, the private managers and the banks are going to have to try and sell those stakes for whatever they can get. That's where the deflation comes. If you start to have forced sales of assets by creditors, for example, who are just trying to recover whatever they can, that's not a very positive scenario. We wrote a long piece about this in in the blog for our premium subscribers and it probably got one of the best responses of uh of our readers probably in the last 6 months. People were really astounded by some of the things that we told them. >> Okay. And just to re-emphasize, 15 to 20% are insolvent. That's what you worked out. >> They're not able to pay their debts. They usually, you know, most private equity funds will put a certain amount of equity into a company and then they'll put debt on top of it because it's more efficient. But that assumes that the company makes money. >> Mhm. >> What happens if the company doesn't make money? Then they can't service their debt. So many firms in this situation have done what we call payment in kind where they give the creditors shares instead of cash. And that can, you know, buy you a little bit of time if you've got a window to try and fix, >> but that's it. At a certain point, the banks are going to pull the plug and they're going to say, "No, we're going to take over the company." So, the creditors become the new owners. It's like bankruptcy. >> No. Interesting. >> See, what you see today, Julie, is that people don't file bankruptcy as often as they used to. They simply go into a negotiation. uh investors have lost a lot of their rights when it comes to uh creditor uh protections. So there's almost no point forcing them into a bankruptcy. You're better off just saying, "Okay, fine. We're going to take control of the company." And you negotiate a solution if possible. But again, you know, if the if the basic firm is not making money and it has too much debt, then you got to fix it. >> That's interesting, too. You know how I'm gonna have to get back on the show is um Dr. Ed Alman from NYU uh creator of Zcore. We've talked about >> bankruptcies and I I I can't not I cannot remember but the last time we talked about it there are like different ways of doing a bankruptcy that's not like >> as you put it like >> they'll typically do what's called a prepackaged insolveny. >> Mhm. >> If they have to actually file with the court and then they'll go to the court and say look we've got a deal. approved the deal. Hopefully the judge will agree. U but the whole assumption here, Julie, is that you've got to have a formula that gets the company profitable again. And the cheap credit that's been available for years has allowed people to do a lot of silly things that may or may not work so well in the future. And that's part of the reason why you've heard President Trump and others talking about the need for lower interest rates. It's not for consumers. It's because of what's going on in the commercial sector. >> I was gonna say what I they're not going to be happy if they don't get lower rates then next year. If they just get a single rate, that's probably not going to cut it. It's not going to do it. Yeah, >> that's right. And some of these companies in, you know, lower interest rates are not going to help them. If you have an office building that nobody needs, lower interest rates are nice, but it's not going to fix the basic economic issue, which is that the asset needs to be repurposed to other other uses. That's going to take time. >> You know, the number of commercial buildings that are being converted to residential in New York City is quite impressive. Uh but the amount of cost that's involved is also uh impressive and rather considerable. It's not cheap. Uh you often lose 20% of the square footage in a commercial building when you have to convert it to residential because of the changes you need to make uh in order to make it viable. >> Yeah, a lot of different changes. Um, just real quick, um, it was distressed exchanges, uh, which is that technique that's pretty popular now so you can avoid the bankruptcy in the courts. It's like under the radar. >> Sounds better than bankruptcy, doesn't it? Distressed exchanges. >> And then no one's and that's going to also sound boring and no one's going to like look into it. But you just inspired me. I have to do that again another episode. Okay. Um, on the private credit, so we have private equity. That's an issue um, as you put it, but let's explore private credit a bit more. Um the war rats, right? >> War rats. That's right. Well, there it's it's a hidden risk is what it comes down to. This is a world where a lot of uh large Wall Street firms, you know, Wells Fargo, Goldman Sachs, JP Morgan, all of them have been providing loans to non-bank financial companies that in turn go out and do various credit strategies. If the strategies work, great. If they don't work, then the banks are on the hook for this and there's not a lot of assets left over for them to pick over and try and do recovery on their loans. So that's why I think this is a hidden risk for next year. You're going to hear more about this. You're going to see more colors, more first brand kind of situations where you had a combination of a lack of profitability and fraud. Uh and it's going to hurt some banks that have been uh involved in this sector. I feel like we're getting a lot of great like outlook from you. So, the hidden risk going into next year. I love it. And then bank earnings up next year. >> Um housing I guess on track for that misery on the eights. Um >> we talked about >> home prices are going to come down next year. Okay. >> And that's good for consumers. >> Mhm. >> But I think I want to wait for that misery part, Chris. >> Oh, well, you're know you're an astute investor, Julia. You're looking for a deal. I am looking for definitely a deal. Um, okay. So, we have to also talk about um what else is going on in your world uh in the mortgage market. Can't even talk about GS. I know you've been writing about Jenny May this week. Um, >> well, yes. I I had a paper that I published on the social science network, a long-haired paper >> uh that talks about the risk between Fanny May and Freddy Mack on the one hand and Chinny May on the other. Um the irony of uh the US housing market, Julie, is that we have the Treasury supporting the middle of the market, Fanny May and Freddy Mack, which are basically for middle class home buyers, but we don't have any liquidity support for Jinny May, which is for lowincome home buyers, first-time home buyers. It's a historical uh quirk because in the old days, and I mean 20, 30, 40 years ago, Ginnie May was a bank market. there were almost no non-banks participating significantly in that market. Today, non-banks have three quarters of the market, more like 80% actually. So, that's why there's a policy issue here. And it was interesting uh the Financial Stability Oversight Council came out with their report this week and they basically left the same language that Janet Yellen used uh when she was Treasury Secretary. I thought that was interesting. They said nice thing about crypto and stable coins and all this other nonsense, but they uh did not change the guidance on non-bank financial companies, which I thought was very interesting. >> Why? >> Uh they probably couldn't think of anything to say. They were too busy writing about crypto and how stable coins are going to save the dollar and the rest of >> I know you don't think that's going to be the case. >> No, probably not. But, you know, it's just the way the Trump administration is. say you're all in on cryptocurrencies and the rest of it. So, you know, there's not much we can do about that. Even Secretary Bessant uh has been going on and on about how stable coins are going to support the dollar, but as you and I have talked about, this is zero sum game. If I buy a stable coin, the guy who sells it to me is going to put the cash into treasury bonds. So, that doesn't really change the equation very much. >> Do stable coins make sense in your view? No, they're like prepaid gift cards. If I'm Amazon or Walmart and I want to issue a stable coin to get people to come into my portal and buy stuff, that's okay. I think that makes sense. But as a vehicle for people to use as a means of exchange, not so much. I if you have a stable coin that has an explicit yield, it's a security and you have to go to the SEC and get it approved. So, you've seen some issuers go in that direction, but just a stable coin to use to buy and sell stuff, I I don't know if there's much of a use case there to be honest with you. Uh it's certainly not apparent to me. But if you're a big retailer like a you know, if you're Verizon or someone like that and you want to generate sales, you give people a discount on the stable coin, maybe you give them 2 3% off and you use that to generate uh sales. I I think that's a more compelling uh model than just saying, "Oh, come buy my stable coins so you can pay to use it and I'm going to keep the return on your dollars." That doesn't make a lot of sense to me. >> Yeah, I might put that in my too hard pile. I don't know. >> Well, yeah, you can give people stable coins in their Christmas cards, right? >> Yeah. There you go. Um, another topic I have to bring up with you this week, CDS. I feel like a lot more people are talking about credit default swipe credit default swaps. CDS um Oracle CDS spiking. >> Yes. >> And I've heard more people talk about this. Like what do you make? What do you make of it? >> Oracle got caught up in the artificial intelligence hype uh and they felt the need to go out and spend tens of billions of dollars building data centers, you know, which are essentially infrastructure for this stuff. But as I keep coming back to Julia, how many large language models do we need for AI? And the answer is one. There's no great insights in these models that are going uh through our existing language and books. I'm actually participating in the settlement against anthropic because they downloaded a couple of my books for their AI. >> How much Okay. How much money do you get per book that they use? >> Oh, probably not very much. I'm sure the guys at WY will take care of it. But the point is is that how many times do we have to have Meta or Oracle or Google or all of these other firms or the Chinese companies looking at the same data? That's what we're talking about. We're talking about the existing body of language that these models are going to try and use to come up with artificial intelligence. I I think it's a pig and a poke to be honest with you. You know, Yan Lun, the the former head of AI from Meta, has said this very well. go look for him on uh on YouTube. Um so, you know, I think more interestingly, by the way, is the uh the battle over Warner Brothers discover. That's interesting because, you know, my brother Michael wrote a great blog post saying this isn't about this merger. This is about how are we going to survive in the world of media against YouTube, which is what I mean, you use YouTube. Many of our friends in the media are now using YouTube as their broadcast channel. That's because you get more eyeballs. >> They have won the battle. So, you know, I think it's a matter of time, as Michael was saying in his blog post before Apple is going to turn around and buy Disney. Imagine that. >> I got demonetized yesterday for a little bit on YouTube. But >> you can't say in the headline on YouTube. They'll demonetize you for a little bit, but uh >> uh >> got to behave now. >> I will behave. All right. We have some uh viewer mail email. You ready? >> Yes, ma'am. >> All right. This is from viewer Jay. Chris mentioned in his recent podcast with you that if home prices fall, we'll see a consensus amongst the FOMC for lower rates. And I assume he meant lower mortgage rates as well as lower Fed funds rate. But does Chris believe the Fed has that much control over mortgage rates or any long-term rates without QE? For example, we saw mortgage rates fall about 1% from the fall of 2023 through early September of 2024 before there were any rate cuts or before there were any cuts to the Fed funds rate. And then oh, sorry. And then when the Fed did cut the Fed funds rate a total of 1% in the fall of 2024, mortgage rates went the opposite direction and rose one about 1%. I often see analysts argue that the Fed effectively just follows the 2-year Treasury responding to the same macro conditions that the bond market does. I would love to hear Chris's thoughts on this. >> Well, as we've said uh on on this program before, mortgage lenders set the rates on mortgage loans. The markets don't set those rates. They are a function of a lot of things that the Fed doesn't control, like the spread between Treasury bonds and mortgage yields. So, in the past month or two, you've actually seen mortgage rates go up, even though we're talking about lower interest rates targets from the Fed. So, your viewer is completely right. The Fed only indirectly influence housing uh through their targeting of short-term funds because remember, a 30-year mortgage gets priced off the 10-year Treasury. So it really matters how that bond is moving, investor demand for that security, that sort of thing. You've had a lot of demand recently from REITs and non-bank investors for mortgage paper. But the one group who have not participated in this are the banks. The banks are essentially keeping their allocation of mortgages, whether it's whole loans or mortgage back securities pretty much flat. And it's just their preference. they can do other things like lend money to non-bank financial institutions at much higher rates even though that's a risky kind of activity. So it's there's a lot of different factors that come into play that determine what a consumer sees when you're out shopping around for a mortgage. What I would tell you though is that the mortgage lenders are all assuming that we're going to have rate cuts next year and they're going to start pushing coupons down even before the Treasury market validates that sort of a decision. Why? They want the volumes. Everybody's hungry. The mortgage industry has been starving for the past four years uh ever since the Fed raised interest rates. And it's, you know, largely an entrepreneurial business. These people want to go out and make loans. So they will push mortgage rates down before the Treasury market validates that decision and it's it's just part and parcel of how the industry works. >> Okay, we have another viewer question. This is from viewer Manish. Can you please ask Chris where he stands on manufacturing renaissance? Does he think President Trump is going to be successful in bringing back manufacturing? >> No, I I that's a very long-term uh goal. I think they would like to decouple uh the supply chain in the United States from China. Uh as you can see the president has recently had to walk back some of his earlier rhetoric and uh try and be more accommodative to the Chinese. The you know China is the biggest source of deflation in the world. You can see this with electric cars. They have just buried the world in EVs whether we want them or not. And you know, the rest of the auto industry is is reeling from this because they're not as efficient as some of these Chinese producers. Uh you've just seen Ford and Renault, for example, try and do a deal where they're focused on EVs in the future. So, can we get production to come back to the United States? Yes, that'll happen over time, but it's also going to be governed entirely by whether or not it makes sense. Can we make semiconductors in the United States again which is a very capital inensive business perhaps but again that takes years and years to make that happen. Building a fab in this country would take you at least 8 to 10 years. So I I think that's the goal the stated goal of the Trump administration. Whether it's going to actually be a reality is is something else entirely. >> And this final question comes from viewer Joseph. Um they wrote in the comment section of our last rap with Chris Whan. So is Chris implying that 10-year treasuries are a good investment now? Is he implying that more QUEI is coming? >> Well, are treasuries a good investment? No. I I personally own other things for income. I own analy the the REIT which pays you 15% a year. I'm more or less indifferent to the price of the stock because you buy REITs for income. I think treasuries are likely to rally in terms of price. So, if you're focused on the price of the security, it may be an interesting trade in a short-term sense. But does the coupon on a Treasury bond uh, you know, move me one way or another? No. Uh, Treasury bonds are essentially, you know, the lowest income vehicle you can buy, but also they're liquid, and that's the trade-off you have to assess. There are many other securities you can buy for income, but if you want to play the rate cut scenario, you might look at the 10-year, but you might also look at some of the shorter uh maturities. Another uh viewer earlier mentioned the 2-year. The 2-year Treasury turns out to be one of the most interesting indicators of Fed policy. If you were just going to follow one thing, I would tell you to follow the two-year. >> Follow the tier. Chris, I have to say we love this weekly recap with you. um the rap with Chris Whan every single week. The audience has just been so incredible. You've been amazing helping us all learn and get better. We're so appreciative. Before I let you go, let folks know where they can find you and support your work. Also, if you all have questions, please leave them in the comments, shoot me an email. Um Chris, thank you so much and the floor is all yours for any parting thoughts. >> Well, yes, thank you uh to all of the viewers. We appreciate the questions very much and your attention. Uh I published the institutional risk analyst. We're running a sale through the end of the year if you want to become a premium subscriber. We do a quarterly call for our viewers and we have a lot of other interesting uh benefits that go along with it. I publish a column for National Mortgage News if you're into real estate and I'm active on X and LinkedIn under RC Whan. I want to wish everybody a big merry Christmas. We'll be back next week of course and uh I hope everyone has a wonderful new year. >> You too, Chris. really appreciate you and I look forward to seeing you next week. Thanks again.
Chris Whalen: No Fed Consensus, Home Prices Falling & The Hidden Risk For 2026
Summary
Chris Whalen, chairman of Whalen Global Advisors and author of The Institutional Risk Analyst blog, joins The Julia La Roche …Transcript
Most of this is about economics. It's about inflation. Inflation is the most important issue for most Americans right now. They see the bills coming in. They see that the numbers are higher and their wages and their income are not keeping pace with the rate of inflation. This is the first time that this has really been the case in 50 years. Welcome back to this week's episode of the rap with Chris Whan where we are joined by Whan Global Advisors chairman, author of the institutional risk analyst blog, author of multiple books and the very best independent analyst that you will find on Wall Street, friend of the show. It is so wonderful to see you again, Chris. Really appreciate you. >> Well, a pleasure. Likewise. >> Okay, there's been a lot happening this week. Um let's start with the FOMC. Um we saw our third rate cut, another 25 basis points. Some other things in the release I want to get to as well in the statement, but let's start there. More of your reaction. >> Well, there's no consensus on the Fed. Uh there are a number of members of the committee who would have done nothing. Uh they got a majority to support a quarter point cut. I think they will probably do nothing uh in the next meeting simply because the stated goal of the committee is one cut next year and one cut in 27 so they get short-term rates down to about 3%. I think that's a good objective. Uh that means that mortgage rates hopefully are going to settle down into the kind of high to mid 5% range which will be good for the industry. I don't think we should be more aggressive than that uh in contrast to what President Trump has been asking for because you don't want home prices to spike upward. Uh the whole point I think of policy should be to try and settle down the housing market from what happened during COVID. You know, the Fed dropped rates to zero. We had record issuance and then of course people went out and bought a lot of houses whether they needed them or not. And that saw home prices on average in the United States go up 50% in less than five years. That's why affordability is the big political issue that it is today in this country. So to me the the interesting thing about the Fed, Julia, is it it they don't really have a clear consensus as they normally do because you have Steve Mirren uh who is agitating for more rate cuts. They want to try and help the Republican fortunes in uh next year's midterm election. I think frankly that President Trump has already cooked the Republicans and he's going to be facing impeachment proceedings uh right after the election. So there you are. >> Wow, that's a bold prediction. Okay. Well, we're heading to 2026. >> I mean, come on. Do you Do you think the Republicans would win the midterms right now? >> Okay. No. No. But Okay. What? you think he'll get impeached? >> Oh, the Democrats, if they control the House, >> that they will they will vote for impeachment and then the Senate will ignore it. Uh but my point is is that the politics have shifted dramatically since Trump won the election. He has alienated a lot of constituencies that supported him and his victory. Uh so, you know, you sit down and do the math. Uh they're trying to redistrict uh states like Texas. They tried in Indiana. The Republicans in Indiana said no. So, you know, it's a mixed bag for the Republicans right now, and they're going to have to try and do something to reposition themselves for next year's midterms. >> It seems like there'll just be a lot of uh swinging back and forth. Yeah. And who's Yeah. And who's really going to solve our problems, but uh Yeah. So, you don't see a Sorry, not to make it a political show. Well, they're going to get so mad at me in the comments, but you don't see a way to rectify this? >> No. Listen, most of this is about economics. It's about inflation. Inflation is the most important issue for most Americans right now. They see the bills coming in. They see that the numbers are higher and their wages and their income are not keeping pace with the rate of inflation. This is the first time that this has really been the case in 50 years. going back to Gerald Ford, remember the wind whip inflation now buttons? You weren't even born then. >> I do know about these buttons. The wind buttons, >> but you know, it it's become topic A for many Americans. And that's why if the Republicans are not responsive to that issue, then they've got to go out and focus on other issues, focus on negatives. You know, they can talk about Zohar Mandami in New York City and his socialist agenda. But the reason you see so many Democrats turning to an explicitly socialist agenda is simply because of inflation and affordability. >> And you mentioned again afford affordability. I feel like that's just been the buzzword of late. Um >> Oh, it is. But we're going to have a home price correction. We're going to end up being right on that one. >> Yeah. I wanted to ask you about that because um even this week we did see like um I think it was the CNBC had a headline of home prices decline for the first time in two years albeit fractionally. But I wonder is that like a taste of what's to come. >> It's it the average price is what they're talking about in the headlines. Markets are still very local, Julia. Every market is different. That's true. So, here in New York, home prices are holding up much better than I had anticipated because there's no new construction, very little. Um, especially for single family homes in and around New York City. On the other hand, you have a lot of supply down south as you and I have discussed. That supply is waiting for rates to come down. That's one of the reasons President Trump has been talking about interest rates. But on the other hand, the thing that you don't see in the headlines a lot is commercial real estate. We talked in the note uh you know today about a couple of very interesting situations. One in Los Angeles, one in New York where you have assets going for a third of what the appraised value was 5 years ago. >> Wow. >> Now these are big office buildings. The use case for the office building is no longer what it used to be. The one in New York is on Second Avenue just above the United Nations. That's a residential neighborhood. You don't need an office building there. Especially given what's going on in New York City today in terms of the business community. Uh we've seen JP Morgan finished their headquarters on Park Avenue. All of the landlords of buildings that Jaime Diamond had been renting for his people are kind of walking on eggshells right now because they're not sure at the end of the day if their buildings are going to be fortunate enough to get new leases or if Morgan is going to move out. >> There aren't a lot of big tenants like JP Morgan that can take up a whole building on Park Avenue above Grand Central Station. So that's, you know, that's the uh the issue really is I think the hot spot in real estate right now is not residential, but it's it's commercial >> commercial side. All right. Let me ask you um before we move off of the Fed, the Fed announced um reserve management per purchases, reserve management purposes to maintain the ample supply of reserves and let the balance sheet grow. The question I have is why do you think this is happening now? And why isn't this just QE but under a different name? >> Well, they they are starting to purchase securities for the balance sheet, but they're only buying Treasury securities. They're not going to buy mortgages. The mortgage portfolio is going to continue to run off. And indeed, as rates fall, the prepayments on those mortgage back securities that the Fed has been sitting on for several years now are going to accelerate. So, it's going to help them fix that problem. Is this the start of quantitative easing again? No. Well, I think it goes back to really before CO when the Fed wanted the portfolio to track what the Treasury was issuing in the market in terms of maturity and continue to grow along with the economy and obviously along with the federal debt. You know, the Treasury just raised $600 billion last week uh in order to keep their cash pile at the Fed where it needs to be to make payments. So the eb and flow of the treasury's cash, the reserve balances that you just mentioned and also the banking system and and how their positions look are very very important to how the Fed at least tries to manage the overall liquidity situation in the market. They are airing on the side of more liquidity as opposed to less because of what we talked about earlier. Pressures in the money market. >> Yeah. About the repo market. Yeah. In the >> That's right. And so far so good. We haven't seen any additional stress like we saw last month. And part of the reason that they announced what they did is simply to make sure that there's a little bit extra money out there in the street so that they don't have problems as we go in the year end because you know here it is. We're almost the middle of December. Most banks are going to close their books and tell their people not to take any more risk until we get into January. So I think that's part of the uh the script and the Fed is you know as I say they are trying to manage things in a way that avoids problems. They don't want a repeat of 2018. >> That makes me wonder though they're like what do they see? Are they just trying to get out in front of something? Because it seems like the market kind of cheered it on. Um >> right. So >> they don't see is the problem. the models that they have are not really useful in terms of informing the members of the board of governors or which is the the group that decides the Fed's balance sheet and and you know so they have to kind of guess they have models that look at liquidity as a percent of GDP which to me is completely useless. The other issue of course Julia is that liquidity is not continuous. You could have banks that are providing liquidity to the market. You can have other banks that have folded their arms and said, "No, we're fine. We'll talk to you in January." That has happened in the past. So there are pockets of the markets that are tighter than others and the liquidity, it's not like water. It doesn't just flow everywhere evenly. It gets compartmentalized. It can be very inefficient at times. And the Fed is cognizant of this. They know that they don't have visibility into liquidity really. It's very hard to measure. So, they're airing on the side of uh too much as opposed to too little. >> 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. The other headline I have to bring up with you this week, especially because you are known as a bank analyst, JP Morgan's Maryanne Lake, who now runs the consumer bank, she was the CFO several years ago. That's why it was interesting to me. Uh made some comments at a conference about how JP Morgan expects 105 billion in expenses next year, which was above well above I think was four billion above consensus. >> So um >> that was quite curious to me. Um what did you make of it? >> Well, what Maryann Lake did was pre-announce um earnings for next year. In other words, she felt the need to inform analysts and investors that their view of the world had changed and that they expected their expenses to be higher. Everybody in that conference at Goldman Sachs was rather surprised to hear this because you know Maryanne is a very respected lady on Wall Street, very, you know, good financial professional and yet she had to make this announcement because as a representative of the bank, which is a large public company, uh when things change, especially when their guidance has changed, uh they have to let people know. >> So that was essentially a pre-release. uh and she didn't take a lot of questions. A lot of people were surprised. What I would tell you is is that the folks at JP Morgan are no different than the Fed in terms of having perfect information and perfect visibility over what's going on in their business. Um but I'm not that worried about their expenses. I'm much more worried about JP Morgan's lending to uh nondepository financial institutions and funds. I think that's where the risk is for next year. >> Okay. So, let's stay on this one and then I want to get into the um the non-depository financial institutions lending. But but just on JP Morgan, we can't read into it like a bell whether that the other banks might have similar issues around the expenses or I don't know maybe you're the guy. >> That's the fear. That's why people reacted the way they did in the markets. I don't think so. JP Morgan, you know what Marian Lake said is this is related to growth. Okay? In other words, we are growing our business in certain areas and our view of expenses has changed so that we expect the numbers to be $4 billion higher than we thought it was going to be in 26. That's a significant number. It's, you know, on a hundred billion baseline, that's a 4% increase, which we did not expect. So, that's why analysts, I think, were a little bit taken aback. Mhm. >> Uh but does it imply that other banks are going to have similar pressures? I don't know. It's hard to say. Personnel costs are really the big toggle for most banks. They have been able to hold the line on other expenses, what we call non-interest expenses of banks. So I I wouldn't say that you're going to see a big uptick in expenses for banks next year. And in fact, credit costs are probably going to remain low. So uh I'm expecting higher earnings for the industry next year. >> Okay. So, higher earnings for the banking industry next year. All right, let's talk about the NDFIS, non-depository financial institutions, because you mentioned JP Morgan funding loans to NDFIS. Um, that it's reminiscent of the 1920s rollover practices. I know you as a historian of economics and markets. Take us back. Draw the parallel that you see. Um, explain it for us. Well, there's been slack demand in most business lines for banks when it comes to loans. The one area that has been galloping along are non-bank financial institutions. Why is this? Well, after 2008, we put a lot of restrictions and uh cautionary rules in place to prevent banks from doing what they did before the great financial crisis. So, what did they do? They lend money to non-banks and they let them go out and make silly decisions in terms of credit. One of the big areas I worry about is private equity. About 15 to 20% of all private equity companies in this country are basically insolvent. They can't pay their debt and they've been giving people more shares or they've been acrewing more principle on on debt because they don't have the cash to pay it. Now what happens in that case is that eventually the private equity manager is going to go out to the limited partners and say hey we need cash. We have to recapitalize this company. The LPs may say no. They may say well I'm not throwing more good money after bad. Uh why why should I do that? Then the private equity manager will turn to the bank because they have a credit line with the bank. They'll borrow money to try and fix the situation, but the bank doesn't have recourse to the private equity manager. Most of them wave recourse. What does that mean? It means that if the loan goes bad, the private equity company that's losing money gets seized by the bank and the bank's going to try and sell it. Now, that is an ugly situation because you know what'll happen. and they'll try and go out into the market and get whatever for this company and they won't get very strong bids. So I see a a deflationary risk facing the US banking industry coming both from private equity and private credit. These big non-banks, the Apollos and the Aries and the Brookfields and the rest of them have been just pumping this sector up relentlessly over the past several years and I think the banks have a lot of risk here. So it's something we're going to watch next year very closely. Okay, wait a second. Okay, so just to elaborate a bit more that it could be deflationary. Can you just kind of explain it for us? Help us understand how >> the risk that you see, how you see it playing out, what are the scenarios that you see? Well, you know, if you have a company that has been privately funded by a private equity firm and the company's not making money and they can't uh perform on their debts, at some point the private equity fund is going to have to pull the plug and liquidate the company. You're already starting to see this in cases where they have pulled on a bank line to try and buy some time and and hopefully get the company right side up so they're no longer losing money. If that turns out to not work, then the bank is going to own the the the portfolio company of the private equity firm. And that's where you could see some forced sales, forced liquidations of assets, of shareholdings. You know, imagine if a bank ends up taking 20% of a a private equities uh firm's portfolio company and they go out into the market and trying to sell it for whatever they can get. That's the kind of scenario I worry about. Uh same thing with private credit. You have an awful lot of uh structures out there that have been sold to retail investors or that fund uh pension funds and annuities. That could be a mess as well because if it turns out that those investments have gone bad, the private managers and the banks are going to have to try and sell those stakes for whatever they can get. That's where the deflation comes. If you start to have forced sales of assets by creditors, for example, who are just trying to recover whatever they can, that's not a very positive scenario. We wrote a long piece about this in in the blog for our premium subscribers and it probably got one of the best responses of uh of our readers probably in the last 6 months. People were really astounded by some of the things that we told them. >> Okay. And just to re-emphasize, 15 to 20% are insolvent. That's what you worked out. >> They're not able to pay their debts. They usually, you know, most private equity funds will put a certain amount of equity into a company and then they'll put debt on top of it because it's more efficient. But that assumes that the company makes money. >> Mhm. >> What happens if the company doesn't make money? Then they can't service their debt. So many firms in this situation have done what we call payment in kind where they give the creditors shares instead of cash. And that can, you know, buy you a little bit of time if you've got a window to try and fix, >> but that's it. At a certain point, the banks are going to pull the plug and they're going to say, "No, we're going to take over the company." So, the creditors become the new owners. It's like bankruptcy. >> No. Interesting. >> See, what you see today, Julie, is that people don't file bankruptcy as often as they used to. They simply go into a negotiation. uh investors have lost a lot of their rights when it comes to uh creditor uh protections. So there's almost no point forcing them into a bankruptcy. You're better off just saying, "Okay, fine. We're going to take control of the company." And you negotiate a solution if possible. But again, you know, if the if the basic firm is not making money and it has too much debt, then you got to fix it. >> That's interesting, too. You know how I'm gonna have to get back on the show is um Dr. Ed Alman from NYU uh creator of Zcore. We've talked about >> bankruptcies and I I I can't not I cannot remember but the last time we talked about it there are like different ways of doing a bankruptcy that's not like >> as you put it like >> they'll typically do what's called a prepackaged insolveny. >> Mhm. >> If they have to actually file with the court and then they'll go to the court and say look we've got a deal. approved the deal. Hopefully the judge will agree. U but the whole assumption here, Julie, is that you've got to have a formula that gets the company profitable again. And the cheap credit that's been available for years has allowed people to do a lot of silly things that may or may not work so well in the future. And that's part of the reason why you've heard President Trump and others talking about the need for lower interest rates. It's not for consumers. It's because of what's going on in the commercial sector. >> I was gonna say what I they're not going to be happy if they don't get lower rates then next year. If they just get a single rate, that's probably not going to cut it. It's not going to do it. Yeah, >> that's right. And some of these companies in, you know, lower interest rates are not going to help them. If you have an office building that nobody needs, lower interest rates are nice, but it's not going to fix the basic economic issue, which is that the asset needs to be repurposed to other other uses. That's going to take time. >> You know, the number of commercial buildings that are being converted to residential in New York City is quite impressive. Uh but the amount of cost that's involved is also uh impressive and rather considerable. It's not cheap. Uh you often lose 20% of the square footage in a commercial building when you have to convert it to residential because of the changes you need to make uh in order to make it viable. >> Yeah, a lot of different changes. Um, just real quick, um, it was distressed exchanges, uh, which is that technique that's pretty popular now so you can avoid the bankruptcy in the courts. It's like under the radar. >> Sounds better than bankruptcy, doesn't it? Distressed exchanges. >> And then no one's and that's going to also sound boring and no one's going to like look into it. But you just inspired me. I have to do that again another episode. Okay. Um, on the private credit, so we have private equity. That's an issue um, as you put it, but let's explore private credit a bit more. Um the war rats, right? >> War rats. That's right. Well, there it's it's a hidden risk is what it comes down to. This is a world where a lot of uh large Wall Street firms, you know, Wells Fargo, Goldman Sachs, JP Morgan, all of them have been providing loans to non-bank financial companies that in turn go out and do various credit strategies. If the strategies work, great. If they don't work, then the banks are on the hook for this and there's not a lot of assets left over for them to pick over and try and do recovery on their loans. So that's why I think this is a hidden risk for next year. You're going to hear more about this. You're going to see more colors, more first brand kind of situations where you had a combination of a lack of profitability and fraud. Uh and it's going to hurt some banks that have been uh involved in this sector. I feel like we're getting a lot of great like outlook from you. So, the hidden risk going into next year. I love it. And then bank earnings up next year. >> Um housing I guess on track for that misery on the eights. Um >> we talked about >> home prices are going to come down next year. Okay. >> And that's good for consumers. >> Mhm. >> But I think I want to wait for that misery part, Chris. >> Oh, well, you're know you're an astute investor, Julia. You're looking for a deal. I am looking for definitely a deal. Um, okay. So, we have to also talk about um what else is going on in your world uh in the mortgage market. Can't even talk about GS. I know you've been writing about Jenny May this week. Um, >> well, yes. I I had a paper that I published on the social science network, a long-haired paper >> uh that talks about the risk between Fanny May and Freddy Mack on the one hand and Chinny May on the other. Um the irony of uh the US housing market, Julie, is that we have the Treasury supporting the middle of the market, Fanny May and Freddy Mack, which are basically for middle class home buyers, but we don't have any liquidity support for Jinny May, which is for lowincome home buyers, first-time home buyers. It's a historical uh quirk because in the old days, and I mean 20, 30, 40 years ago, Ginnie May was a bank market. there were almost no non-banks participating significantly in that market. Today, non-banks have three quarters of the market, more like 80% actually. So, that's why there's a policy issue here. And it was interesting uh the Financial Stability Oversight Council came out with their report this week and they basically left the same language that Janet Yellen used uh when she was Treasury Secretary. I thought that was interesting. They said nice thing about crypto and stable coins and all this other nonsense, but they uh did not change the guidance on non-bank financial companies, which I thought was very interesting. >> Why? >> Uh they probably couldn't think of anything to say. They were too busy writing about crypto and how stable coins are going to save the dollar and the rest of >> I know you don't think that's going to be the case. >> No, probably not. But, you know, it's just the way the Trump administration is. say you're all in on cryptocurrencies and the rest of it. So, you know, there's not much we can do about that. Even Secretary Bessant uh has been going on and on about how stable coins are going to support the dollar, but as you and I have talked about, this is zero sum game. If I buy a stable coin, the guy who sells it to me is going to put the cash into treasury bonds. So, that doesn't really change the equation very much. >> Do stable coins make sense in your view? No, they're like prepaid gift cards. If I'm Amazon or Walmart and I want to issue a stable coin to get people to come into my portal and buy stuff, that's okay. I think that makes sense. But as a vehicle for people to use as a means of exchange, not so much. I if you have a stable coin that has an explicit yield, it's a security and you have to go to the SEC and get it approved. So, you've seen some issuers go in that direction, but just a stable coin to use to buy and sell stuff, I I don't know if there's much of a use case there to be honest with you. Uh it's certainly not apparent to me. But if you're a big retailer like a you know, if you're Verizon or someone like that and you want to generate sales, you give people a discount on the stable coin, maybe you give them 2 3% off and you use that to generate uh sales. I I think that's a more compelling uh model than just saying, "Oh, come buy my stable coins so you can pay to use it and I'm going to keep the return on your dollars." That doesn't make a lot of sense to me. >> Yeah, I might put that in my too hard pile. I don't know. >> Well, yeah, you can give people stable coins in their Christmas cards, right? >> Yeah. There you go. Um, another topic I have to bring up with you this week, CDS. I feel like a lot more people are talking about credit default swipe credit default swaps. CDS um Oracle CDS spiking. >> Yes. >> And I've heard more people talk about this. Like what do you make? What do you make of it? >> Oracle got caught up in the artificial intelligence hype uh and they felt the need to go out and spend tens of billions of dollars building data centers, you know, which are essentially infrastructure for this stuff. But as I keep coming back to Julia, how many large language models do we need for AI? And the answer is one. There's no great insights in these models that are going uh through our existing language and books. I'm actually participating in the settlement against anthropic because they downloaded a couple of my books for their AI. >> How much Okay. How much money do you get per book that they use? >> Oh, probably not very much. I'm sure the guys at WY will take care of it. But the point is is that how many times do we have to have Meta or Oracle or Google or all of these other firms or the Chinese companies looking at the same data? That's what we're talking about. We're talking about the existing body of language that these models are going to try and use to come up with artificial intelligence. I I think it's a pig and a poke to be honest with you. You know, Yan Lun, the the former head of AI from Meta, has said this very well. go look for him on uh on YouTube. Um so, you know, I think more interestingly, by the way, is the uh the battle over Warner Brothers discover. That's interesting because, you know, my brother Michael wrote a great blog post saying this isn't about this merger. This is about how are we going to survive in the world of media against YouTube, which is what I mean, you use YouTube. Many of our friends in the media are now using YouTube as their broadcast channel. That's because you get more eyeballs. >> They have won the battle. So, you know, I think it's a matter of time, as Michael was saying in his blog post before Apple is going to turn around and buy Disney. Imagine that. >> I got demonetized yesterday for a little bit on YouTube. But >> you can't say in the headline on YouTube. They'll demonetize you for a little bit, but uh >> uh >> got to behave now. >> I will behave. All right. We have some uh viewer mail email. You ready? >> Yes, ma'am. >> All right. This is from viewer Jay. Chris mentioned in his recent podcast with you that if home prices fall, we'll see a consensus amongst the FOMC for lower rates. And I assume he meant lower mortgage rates as well as lower Fed funds rate. But does Chris believe the Fed has that much control over mortgage rates or any long-term rates without QE? For example, we saw mortgage rates fall about 1% from the fall of 2023 through early September of 2024 before there were any rate cuts or before there were any cuts to the Fed funds rate. And then oh, sorry. And then when the Fed did cut the Fed funds rate a total of 1% in the fall of 2024, mortgage rates went the opposite direction and rose one about 1%. I often see analysts argue that the Fed effectively just follows the 2-year Treasury responding to the same macro conditions that the bond market does. I would love to hear Chris's thoughts on this. >> Well, as we've said uh on on this program before, mortgage lenders set the rates on mortgage loans. The markets don't set those rates. They are a function of a lot of things that the Fed doesn't control, like the spread between Treasury bonds and mortgage yields. So, in the past month or two, you've actually seen mortgage rates go up, even though we're talking about lower interest rates targets from the Fed. So, your viewer is completely right. The Fed only indirectly influence housing uh through their targeting of short-term funds because remember, a 30-year mortgage gets priced off the 10-year Treasury. So it really matters how that bond is moving, investor demand for that security, that sort of thing. You've had a lot of demand recently from REITs and non-bank investors for mortgage paper. But the one group who have not participated in this are the banks. The banks are essentially keeping their allocation of mortgages, whether it's whole loans or mortgage back securities pretty much flat. And it's just their preference. they can do other things like lend money to non-bank financial institutions at much higher rates even though that's a risky kind of activity. So it's there's a lot of different factors that come into play that determine what a consumer sees when you're out shopping around for a mortgage. What I would tell you though is that the mortgage lenders are all assuming that we're going to have rate cuts next year and they're going to start pushing coupons down even before the Treasury market validates that sort of a decision. Why? They want the volumes. Everybody's hungry. The mortgage industry has been starving for the past four years uh ever since the Fed raised interest rates. And it's, you know, largely an entrepreneurial business. These people want to go out and make loans. So they will push mortgage rates down before the Treasury market validates that decision and it's it's just part and parcel of how the industry works. >> Okay, we have another viewer question. This is from viewer Manish. Can you please ask Chris where he stands on manufacturing renaissance? Does he think President Trump is going to be successful in bringing back manufacturing? >> No, I I that's a very long-term uh goal. I think they would like to decouple uh the supply chain in the United States from China. Uh as you can see the president has recently had to walk back some of his earlier rhetoric and uh try and be more accommodative to the Chinese. The you know China is the biggest source of deflation in the world. You can see this with electric cars. They have just buried the world in EVs whether we want them or not. And you know, the rest of the auto industry is is reeling from this because they're not as efficient as some of these Chinese producers. Uh you've just seen Ford and Renault, for example, try and do a deal where they're focused on EVs in the future. So, can we get production to come back to the United States? Yes, that'll happen over time, but it's also going to be governed entirely by whether or not it makes sense. Can we make semiconductors in the United States again which is a very capital inensive business perhaps but again that takes years and years to make that happen. Building a fab in this country would take you at least 8 to 10 years. So I I think that's the goal the stated goal of the Trump administration. Whether it's going to actually be a reality is is something else entirely. >> And this final question comes from viewer Joseph. Um they wrote in the comment section of our last rap with Chris Whan. So is Chris implying that 10-year treasuries are a good investment now? Is he implying that more QUEI is coming? >> Well, are treasuries a good investment? No. I I personally own other things for income. I own analy the the REIT which pays you 15% a year. I'm more or less indifferent to the price of the stock because you buy REITs for income. I think treasuries are likely to rally in terms of price. So, if you're focused on the price of the security, it may be an interesting trade in a short-term sense. But does the coupon on a Treasury bond uh, you know, move me one way or another? No. Uh, Treasury bonds are essentially, you know, the lowest income vehicle you can buy, but also they're liquid, and that's the trade-off you have to assess. There are many other securities you can buy for income, but if you want to play the rate cut scenario, you might look at the 10-year, but you might also look at some of the shorter uh maturities. Another uh viewer earlier mentioned the 2-year. The 2-year Treasury turns out to be one of the most interesting indicators of Fed policy. If you were just going to follow one thing, I would tell you to follow the two-year. >> Follow the tier. Chris, I have to say we love this weekly recap with you. um the rap with Chris Whan every single week. The audience has just been so incredible. You've been amazing helping us all learn and get better. We're so appreciative. Before I let you go, let folks know where they can find you and support your work. Also, if you all have questions, please leave them in the comments, shoot me an email. Um Chris, thank you so much and the floor is all yours for any parting thoughts. >> Well, yes, thank you uh to all of the viewers. We appreciate the questions very much and your attention. Uh I published the institutional risk analyst. We're running a sale through the end of the year if you want to become a premium subscriber. We do a quarterly call for our viewers and we have a lot of other interesting uh benefits that go along with it. I publish a column for National Mortgage News if you're into real estate and I'm active on X and LinkedIn under RC Whan. I want to wish everybody a big merry Christmas. We'll be back next week of course and uh I hope everyone has a wonderful new year. >> You too, Chris. really appreciate you and I look forward to seeing you next week. Thanks again.