Chris Whalen: Private Credit Is a Ticking Time Bomb | Banks Will Take Major Losses in 2026
Summary
Chris Whalen, chairman of Whalen Global Advisors and author of The Institutional Risk Analyst blog, joins The Julia La Roche …
Transcript
There aren't any easy policy prescriptions right now. You know, rates have fallen a little bit, mostly on the the news. You know, you are seeing home prices soften in some part of the country, others not. So, we're not quite yet at that national correction that you and I have been talking about, but it's coming. Welcome back to another episode of the rap with Chris Whan where we break down what's happening in markets and the economy every single week. Chris, great to see you as always. >> Good morning, Julia. >> Good morning, Chris. I love doing this with you. This audience is just absolutely loving it. So, let's get into it. So many areas we can go into this week. Um, I want to start because you put out your latest um, piece, the latest version of the rap on the institutional risk analyst. >> Let's start with something a little spicy for folks. GSSE's you report that GSSE release is officially off the table. So, is that the final word, you think? >> I think so. Once President Trump ordered them to start buying back their own debt to push interest rates down, which is a silly idea, um I think that basically takes them off the table. There's no way you could take them out in a public offering if they're going to be, you know, conducting public policy essentially with private shareholder funds. So, I think it's done. Uh this is kind of the second time around for Trump. uh as you recall in his first term they did talk about it. They did a lot of work. They hired Jim Milstein to come in and you know do an enormous amount of work which is still there by the way. But I don't think anything's going to happen. Uh in fact I think what you're going to see is the GSC's are going to sell most of their Treasury collateral and they're just going to be buying back their own debt which is kind of silly. >> Yeah. Why would they do that? Well, somebody in Washington, and this has been kicked around now for months, uh suggested that if they bought back their own bonds, remember they issued these securities, that it would cause scarcity and, you know, bond prices would go up, interest rates would go down. That's how it works. >> Okay? >> The trouble is is that the GSC's, even if they stay in conservatorship, have to hedge their book. So for every dollar of bonds they buy, they're going to be selling 08 or 0.9 of a dollar to hedge the interest rate risk on the position because they don't have any capital. These entities cannot withstand losses. So they have to be very careful when they do this. >> Interesting. Okay. So as you point out for every dollar the GSC's would buy in MBS, they have to sell treasuries to hedge. So it's net neutral at that point. Is the $200 billion dollar announcement is that just theater then >> it's politics. Okay. >> Donald Trump is, you know, running scared. He worries that if the uh House goes back to the Democrats, they will impeach him on day one, which I think is a a fairly accurate assessment. Uh and he has said as much. We put the link to that uh discussion he had with the Republican lawmakers about two weeks ago and he was very forthright. you know, he said, "These people are going to impeach me." So, I think, you know, they're going to pull out every stop they can, Julia, whether it's rhetorical or substantive, to try and get enough voters to support them in the midterm elections. And let's be fair, we have a lot of things going on right now that are helpful to the Republicans. Look at Zohar Mandami in New York City, uh, with his little Marxist, uh, group. I call this Bill Delasio on LSD. uh you know that he had one of his assistants get up and start talking about white supremacy and how when white people own their own homes this is a form of racism. So it's not like Trump has no possibilities. I think he can just point to the craziness from the other party and say look do you really want these people to come back into power? But like I say, they are trying to find ways to be responsive to the electorate now and it's only going to get worse as the year goes on. >> Interesting. I feel like Yeah. You know, this year I feel like is probably going to be I feel like every week has been like whoa. Okay. So like a Yeah. So I feel like that's probably going to be We're going to have a lot to talk about on the rap. I feel like every single week >> Oh, it only gets better, Julia. It only gets better. Yeah. And you know, for me, I I grew up in a household that was heavily involved in politics. My dad was a speech writer for Nixon and Reagan. Uh and then I see what's going on today and it's it's really quite striking the difference. >> Oh my gosh. >> The lack of seriousness today and the lack of uh a sense of common purpose on the part of members of both parties. You just don't have that. You know what people on the Hill have been working on for the last couple of months? What? This legislation for uh crypto tokens. And now it appears that Coinbase has just shot the whole thing in the head. So, um, probably going to be nothing done this year. >> Okay. Well, let's stay on crypto and then I do want to go back to some housing, but you have been a critic of crypto and it's kind of lacking of intrinsic value. Do you I don't know like how do you look at the sector? Do you think it's just due for like a reality check? Are we already going through that reality check? like what are you kind of thinking about there? >> I've always told my my audience that crypto is a speculative vehicle. It's a polite form of gambling. Um if consenting adults want to do this, that's fine. It's different if you live outside the United States. I have friends who live in Asian countries in Lebanon, Syria. These are places where there's no government. And in those venues, they actually use Bitcoin as money. It's a way that they pay for things. So that's different. But you know, in the United States, Wall Street has pretty much co-opted the world of coins. Uh half of every uh stable coin scheme that's been launched in the last couple years has failed. The losses to investors have been rather significant. And you notice when Bitcoin traded off uh kind of in the fourth quarter through to today, it lost almost 30% of its value. Suddenly, Wall Street is quiet. you don't hear Jaime Diamond talking about it anymore because the volatility is so dramatic that I think it almost makes it unsuitable for most people. So that's, you know, my take on it is it's a fringe phenomenon. It's kind of interesting. Bitcoin particularly, the construction of it, I think, is is fascinating. But other than that, I I prefer gold and silver. You know, I I had a reader beating me up because I hadn't been bullish enough on silver. And I said, "Look, silver is very idiosyncratic. It has a commercial component that gold doesn't have." And you saw it was up threefold in the past 12 months. >> Where is silver today? I mean, I'm so It's just been on an absolute ter. Okay, it's a little it's a little down today. It's 88 uh50. >> It's going to correct. Okay, >> you know, there was a vicious short squeeze here. There was no deliverable silver in Chicago. So that's someone crushed then. Oh >> yes, if if you were dumb enough to be short. Yeah. >> Um but the point is is that there the demand for silver in industry plus the monetary component makes it a much more volatile metal than gold. Gold just does not have that same component. And you have central banks buying gold for monetary purposes. You don't have that with silver. Silver has kind of lost uh its role as a a means of exchange coinage, you know, for hundred years. Silver was abandoned by Germany and the United States more than 100 years ago. >> Yeah, man. For those folks who are kind of in on silver early, I'm certain >> 30 bucks or something. Yeah. >> But I've been buying the miners as well. We have gold and silver in our portfolio which we talk about with our readers. And then I've been slowly buying some of the miners. They're very small. They're difficult to buy. Meil Lynch won't let me buy them because they're penny stocks. >> Interesting. >> So you've got to be careful because they are illquid. >> Okay. All right. Um, another question just on the precious metals front. So gold up 70% silver nearly tripled. But you, what I'm hearing from you is you very much prefer gold as the long-term trade. Is there anything that would change that view for you like on silver? >> If I saw countries starting to issue silver coins, if they embraced it as a monetary metal. Yeah. But I think >> when coins used to have silver in them. Yeah, >> that's right. That's right. We used to have silver dimes. Um, I think, you know, like I say, it's it's the most interesting part of silver is the commercial demand, >> whereas gold is a monetary play. There's no reason not to do both cuz look, let's be fair, look at copper. Copper is also up dramatically this year on a lack of supply. So, in all of these metals, what you're seeing is that there is a lack of deliverable supply, which means that it's a very interesting short-term trade. That is an interesting trade because also when you think about copper, isn't copper like one of those metals? It's known they call it Dr. copper because isn't it like an indicator of the economy and how that's doing? >> Yes. >> Okay. But >> it's so important for industry. >> Yes. At least silver for industry as you point out. Okay. Um very interesting, Chris. Okay. Does it is it reflective of the state of the economy? Like how do you kind of or is that just totally not the way to look at it right now? It it is to some degree but the Chinese are the primary demand for copper. So their eb and flow which may or may not rec you know reflect economic reality. It may reflect the latest edicts coming from the Chinese communist party regarding the economy. Uh so you got to be careful because when the Chinese weigh into that market they can move prices dramatically and that is not necessarily an indication of the global economy but it certainly tells you what the Chinese are thinking about. >> Okay. I want to go back to housing um as we were talking about earlier here because I want to hear your assessment of housing, housing policy, anything being floated in the White House. Like what's You're kind of the guy for this. So like what's your assessment? I read your piece and you called it or somebody called it a bit of a you know I don't a show we could say it. >> Oh, look at that. Um it is because they there aren't any easy policy prescriptions right now. They are looking at everything and anything. Um you know rates have fallen a little bit mostly on the the news rather than on the dynamics in the bond market. You're going to see refinance activity tick up a lot this month and next month. Will that make it easier for people to buy homes? No. You know, you are seeing home prices soften in some part of the country, others not. So, we're not quite yet at that national correction that you and I have been talking about. >> Y, >> but it's coming. And that's to me, that's when you help affordability. The question is, can the Treasury and the Fed step back and allow a reduction in home prices, a 10 or 20% drop, uh, without intervening because they're so concerned that deflation is going to cause markets to become dysfunctional that they haven't allowed it. You know, remember, uh, you know, I'm older than you a little bit. Um, when I was a kid, when home prices weakened, people got an opportunity to buy a cheap house. they would buy something that maybe needed a little work. In Washington, we did that a lot. Washington was a very volatile market, both up and down. >> So, you know, we haven't seen that kind of deflation in housing prices in 25, 30 years. And that's what I think you need to see to help affordability. It's not just about interest rates. >> Okay. But do you think that the Fed or the Treasury, they wouldn't allow it? Would they freak out? Like, what is the thought process? >> They would freak out. Yes. >> Okay. Because if you look at all of the little crises that we've had over the past couple of decades, >> the key component that has caused action at the Fed and the Treasury is they're concerned that the Treasury market may be impacted and they won't be able to sell debt. >> You know, when you have big deficits and when you have to roll over those tea bills every month, uh that's what colors your thinking. Remember when Scott Bessant came into office and he was talking about issuing more long-term debt? Well, that lasted about two weeks, >> right? Right. >> And now Scott is talking just like Janet Yellen. Yeah. >> The only issue is T bills. >> The T bills. Yeah. >> Okay. So, it's like is that the bond market is kind of just controlling or dictating everything that they're doing. Then >> the Treasury market. >> Treasury market. Yes. Treasury market. Okay. What? Okay. Go back real quick. What would actually move the needle on affordability? And is there a way to do it that's like not massively? >> Let prices go down. >> Let them go down. Let's see if we can deflate 20 or 30%. Without causing the uh you know the thing to tip over. Uh because that's what the Fed did. Remember from CO through to about last year home prices went up almost 50%. >> Mhm. >> That was caused by the Federal Reserve Board. >> Yeah. >> Plain and simple. >> Yeah. Yeah. it >> the cost of co and you know what that was the result of was dropping interest rates down to zero people went out and refinanced their mortgages bought houses did all of this right but there wasn't a big supply so when you had that huge rush of people coming into the market house prices went up >> and I mean all house prices vacation homes in Whitefish Montana you know that the entire inventory of vacation homes in the United States basically got bought in 202122 and it's not like we replace these assets and build more, right? So, home building has kind of caught up. You're starting to see supply catch up with demand, but it's taken years. >> 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. Well, misery on the eights. We're not that far away. >> Misery on the eights. >> Yeah. Um I want to talk about the area that I also know you for banks because we are in bank earnings season with um the Q4 results coming out. I know you've been following this closely from the major banks. What what stands out to you from what we've seen so far from the banks? >> Well, they've done well on the Wall Street side. Trading, investment banking has been booming. Uh credit costs are still pretty stable. So you haven't seen an uptick in delinquency in credit cards and consumers generally. I will tell you that there are signs in the lower cortile of consumers. If you look at the FHA, uh delinquency is rising there pretty rapidly. So that's a kind of early indication that we may start to see some economic problems this year, probably the end of the year. But banks right now, Julia, they they're showing us a picture that's great. Uh we did a piece this week as you know talking about how banks lend to private equity firms and I think there's a problem there. Uh it's a problem that they're not talking about and that they're working very hard to conceal. Uh but that's really the only cloud on the horizon. The consumer side of the equation is still good. And you know I think the thing with banks and bank stocks is that they ran very well last year. So, some of the names that you might think of, JP Morgan and and the rest of them didn't do that well in the second half of the year. Uh the the stellar uh bank among the top four was City and they had only barely got to book value. So, you're going to see I think a little more consolidation in bank stocks because they were already pretty pricey as we went into year end. Uh I don't know that it's a great trade to be going long right now. H see that's interesting too because I feel like aren't you only in like one bank stock right now? >> I own some Flagstar. I bought it very cheap. Uh I know the management team and I think they're going to bail that bank out slowly but surely. They have a lot of exposure to multif family in New York City. Uh and that's always a big concern, but I thought well you know why not? Um, the stock was very cheap and as I say, I've known those guys for for many years and I figure they're going to do it because they got started earlier than the rest. There are some banks in New York City who have a lot of work to do when it comes to New York City apartments. >> Oh gosh. Yes. Um, you also just mentioned like when you're doing the recap of the banks that we might we're starting to see some of those delinquencies on the lower end of the consumer side and that we could see maybe some economic problems down the line here this year. >> Um, when you look at banks like how much does that kind of foreshadow the direction of the economy like from that lens? Well, mortgages are an interesting indicator because, you know, if you look at the FHA, for example, those tend to be lower income households. They tend to have to borrow more. They have low credit scores, etc. But, you know, overall, what I watch with the banks is credit cards, unsecured consumer. That tells you a little bit more about the broad population of consumers. And right now, it's pretty benign. uh the banks would like to actually see more demand for these products. But you know to me the big risk on Wall Street today is coming from the institutional investment sector. Private equity and credit are just these rancid pools of illquid opaque assets that nobody can really assess. Uh we talked about a paper that was published by the Fed of New York that I encourage your your listeners to uh to read because you know it tells you that the non-banks don't compete with the big banks. The non-banks take the money from the big banks and go off and do stupid things with it. >> That's what's causes risk. like what happens in the middle there because in the paper and everyone go read the institutional risk analyst and subscribe because it's transformed intermediation credit risk to the NBFIs liquidity risk to banks. That's the paper you're referencing. >> Yeah. And great paper by the way. I applaud the authors. They uh a couple of them are at New York University and the Fed of New York. But they really nailed it on the head because most people think that the way you analyze markets today is to think about banks versus non-bank uh financial institutions competing with each other. But that's not the case. The banks really have non-banks as customers. The non-banks get their liquidity from banks and that's why the risk ultimately goes back to the banking system. >> Yeah. Okay. You had a kind of a funny anacronym in there. P O P >> Poke. >> Yeah, that was coined. >> Yeah. >> What that means is that when some of these private equity firms can't pay their debt, they start to do what's called paying in kind. They give them more equity. And in the strange world of private equity, they consider that a new investment. They don't consider that the company is actually in default. Mhm. >> They say, "Oh, no. The investment in the company went up, so the banks will lend more." >> So when they lend more on a company like that, that's essentially headed for bankruptcy. That's, you know, principle on top of existing principle, original principle. That's how you get poop. >> P O P. Yeah. It's funny. It's an acronym that is deeply disturbing to the guys at uh Apollo and Aries and the other private uh credit shops because uh the guy who coined it is a very wellrespected risk manager. >> Yeah. Nam the plumber. Um okay. So real quick Chris on this whole private credit thing and it's interesting to me like because when it's what's happening in the middle and we probably don't even really talk about that part. It's just >> Can you just explain in pretty much layman's terms the mechanics of this, how it kind of works and why it's so concerning? >> Well, banks lend money to the sponsors of private equity firms, but they're private. Nobody has any idea what these companies are worth because they are private. So, the bankers can't go in and do diligence on them. They take the word from the sponsor and say, "Oh, well, this company is worth XYZ." And so, the bank will lend on that basis. It's blind lending, Julia. It's the kind of lending we shouldn't allow. >> So, we don't get to see exactly what's going on then. >> Oh, no, no, no. See, and remember the heads of these >> Yeah. The heads of these big credit shops were all arguing over the past couple years that private markets are better. No, public markets are better. If you look at Harvard and some of the other big endowments that have gotten their clocks cleaned in private equity, they should have been in the public market. They would have done much better just buying S&P 500 futures. And that's why I always tell my readers, most of your portfolio should always be in public markets. >> Yeah. Okay. So, how did we get to this? Like, where did this all come from? >> Too much money chasing too few opportunities. Julia. >> Okay. Do you think this is a major risk then? And it's just kind of a ticking time bomb. >> I think you're you're going to read about it this year more and more. >> Okay. Well, that's one of your predictions for 2026. Um, >> yes, it is. >> All right. What do you think we're going to read about like >> banks taking losses on private equity investments and also lending to private equity firms? You're going to hear more about losses to investors who are desperately trying to get out of these assets. When you when you see private equity firms selling portfolio companies to one another, it's like NFL coaches, right? Everybody fires their coach and goes off and hires somebody else's coach and they're churning the portfolio. They're not really doing anything positive. It's just musical chairs with assets. And that's what I think you're going to see more and more of uh this year and next year is that the people who are trying to buy time with some of these busted companies that can't go public, can't monetize the investments that they made privately are are going to end up having to take the loss. And it's quite um concerning because you have big banks, not just JP Morgan, but Wells Fargo has jumped into this with both feet. PNC, City, they're all involved and this is the fastest growing part of their balance sheet. >> That's the issue. >> Okay. Something to watch for this year. Um gosh, like I said, I feel like every week is like, wow. Okay. With the headlines and we record on Fridays and air every Saturday and so it's like, oh, the weekend news has been crazy, Chris. All right, I got to ask you this. Um, on Sunday evening, Federal Reserve Chair Jerome Pal revealing he received a subpoena from the DOJ. What do you make of it? >> That's politics. He The Trump people have mishandled the Fed and Jerome Powell. Powell's not a great Fed chairman. He He's a a Fed chairman that you could criticize for many reasons, but, you know, frankly, the Trump administration should have just quietly let him go into retirement. Uh instead they've been attacking him publicly. This whole thing with the Department of Justice is kind of thuggish strongarmmed tactics that are not going to work because what what's happening is we're turning this guy into a martyr. You know who said this on X the other day? Larry Cuddlo for God's sake who's one of the strongest supporters of President Trump. So I think they they really misjudged how they should handle the SE central bank. I think Powell is going to remain on the board when his term as chairman is over. He's he can stay until 28. And why not? He's going to keep that seat away from President Trump. Uh Steve Myin is going to have his term end. He he took another governor's term. So Trump is going to get to appoint a new chairman. My guess is it's going to be Kevin Worsh at this point. But the question is, will the Senate confirm his choice? because people in the Senate are very upset with the way he's handled uh Jerome Powell. >> Oh, what happens if they don't confirm? They have to put a different choice in front of them. Like what's >> No, they could appoint Mickey Bowman as chair on an acting basis because she's already been confirmed by the Senate. >> So, you you know, you can do that. There is a legal opinion that that states that, >> but that's not optimal. And if President Trump loses the midterm elections and there are Democrats controlling House committees, this whole thing is going to be over. >> Yeah, definitely. Um, that's why this year I think it's like midterms are going to be dictating pretty much every move we see, I feel like. Right. I don't know. >> Uh, yeah, I think so. The Republicans are are kind of running scared. They challenged the redistricting in California, for example, and they lost. >> Uh, they won in Texas. So it's a it's a calculus of pennies. They're they're trying to assemble enough wins that they can keep control of the house. >> Okay. So just before we leave the Federal Reserve as a topic, you've talked about and have advocated for like this more decentralized model and focusing more on sound money. How how would you change the current system and what risk do you see if we stick to like just the status quo? Well, I think Kevin Worsh is going to do precisely this, and I think he can get confirmed by the Senate. He wants to get the Fed out of the central planning business, plain and simple. He wants them to go back to their statutory responsibility, and he would probably focus much more on inflation than he would on job growth. There's no way for the Fed to really encourage job growth uh with interest rates. That has been the case for decades. And other than getting Congress to legislate on it, it's tough to make a whole lot of changes. But for example, Julia, the portfolio uh with a chairman wars, you're not going to see them buying lots of bonds. Quite the contrary. Now, the Trump administration, by the way, we didn't talk about this with housing. There have been some discussions in Washington about the Fed starting to buy mortgage bonds again, which has been a disaster financially. Uh but that just shows you how desperate some of the Republicans are when they look at the midterm elections. Anything they can do to show themselves to be responsive to the issue of affordability is being considered. And I mean anything. >> Okay. There's this conversation that they the Fed could resume MBS purchases. Um but do you see do you think that's actually going to happen? Like under like what scenario would that actually happen? Um, well, it's governed by the board. It's not governed by the Federal Open Market Committee. So, you would have to get a majority of the board of governors to approve it. I don't think it's going to happen because, as I say, they've lost so much money on this little hedge fund that Janet Yellen and Jerome Powell started. Um, but, you know, if the president is pushing hard and he has his man in the chairman's chair, they may try. See, because the Fed doesn't hedge their book. when they went out and bought $3 trillion in mortgage securities during COVID, they pushed interest rates down dramatically. And that's uh that's the difference. >> If they've like lost all this money running this little hedge fund, like what isn't that kind of ironic? >> Yeah. I I think Wor actually would probably swap the mortgage paper that the Fed owns today. It's about $2 trillion to the to Fanny May and Freddy Mack and then uh take T bills in return. Get that from the Treasury cuz he wants to see the Fed go back to the classical way of managing their assets which is to be really short. They want most of their investments in securities to be one year or less. >> Yeah. All right. We have just one viewer question. I actually forgot to write down this person's name, so I can't give them a shout out by name, but she would like to know, are you still bullish on NLY Italy at this price level? And could you explain your rationale? >> Um, I own Analy. I continue to add to my position. Uh, my basis in Analy is about 08 of book value. So, I don't buy analy for price appreciation. And I would say to all of the viewers, REITs are not a good vehicle for stock price appreciation. They're a vehicle for income. So, I own analy because they throw off mid- teens yields. That's really the point. Um, I don't play it for price. So, I'm kind of indifferent to the short-term price movements. I like the model a lot. As I think I've said before, the whole crew there at Analy is one of the best REIT management teams in the business. They own mortgage servicing. They're they're very astute. So, you know, that's my attitude. I I don't think any of the REITs are a good investment if you're looking to make uh money on an appreciation in the stock price. They're there really for yield. That's the whole point of a REIT. >> And again, for the folks watching and listening, you can submit questions. Um we love to do viewer questions every week. So, shoot me an email at juli@juliaro.com or just drop a comment um below. Chris, we love that you are so generous. >> You can bug me on X if you want. >> You can bug them on X, too. RC Whing. >> Yeah, I I All the questions I get from my viewers, I put up on X. I had somebody beat me up the other day cuz I wasn't bullish enough on silver. So, >> what are you going to do? >> Oh, man. What are you going to do, Chris? Again, we love this. It's so much fun. We're going to see each other in person for an in-person taping of the rap next week, which will be really fun. Um, before I let you go, let's leave this audience with some parting thoughts. Anything that you'd like to leave them to think about, maybe something you're even thinking about for next week and let them know where they can find you. Support your work. Everyone, go subscribe to the institutional risk analyst. Chris, floor is all yours. >> Well, no, thank you, Julia. I I think we're headed into an interesting year. Uh, we may or may not see interest rates cut again by the Fed. I do think you're going to see some changes in where investors are focused on Wall Street, not so much tech uh as other sectors, maybe more defensive sectors, and they are definitely focused on foreign markets. So, I think you're going to see a weaker dollar and you're going to see some musical chairs on Wall Street in terms of equity allocations. The banks, eh, they're going to be kind of unchanged. I think there's not a lot of upside in most of these names, but uh you know if you guys have any questions, we're always happy to hear them. >> Yes, we are. Chris Whan, chairman of Whan Global Advisors, author of the institutional risk analyst blog. So wonderful to spend time with you every week. Really appreciate it and looking forward to seeing you again soon. >> I know. Dinner with Jim Rickards. Imagine. >> Oh, that is going to be legendary. Okay, now they know. All right. Well, I'm I'm having dinner with Chris and Jim Richards, everybody. and we are going to tape an episode with Jim. So, tune in. >> I think we have to get a Lotus Club picture and show everybody. >> We have to. And we have some other guests who are gonna join us, too. But this is I'm I'm grinning because this is like dream dinner. We so fun.
Chris Whalen: Private Credit Is a Ticking Time Bomb | Banks Will Take Major Losses in 2026
Summary
Chris Whalen, chairman of Whalen Global Advisors and author of The Institutional Risk Analyst blog, joins The Julia La Roche …Transcript
There aren't any easy policy prescriptions right now. You know, rates have fallen a little bit, mostly on the the news. You know, you are seeing home prices soften in some part of the country, others not. So, we're not quite yet at that national correction that you and I have been talking about, but it's coming. Welcome back to another episode of the rap with Chris Whan where we break down what's happening in markets and the economy every single week. Chris, great to see you as always. >> Good morning, Julia. >> Good morning, Chris. I love doing this with you. This audience is just absolutely loving it. So, let's get into it. So many areas we can go into this week. Um, I want to start because you put out your latest um, piece, the latest version of the rap on the institutional risk analyst. >> Let's start with something a little spicy for folks. GSSE's you report that GSSE release is officially off the table. So, is that the final word, you think? >> I think so. Once President Trump ordered them to start buying back their own debt to push interest rates down, which is a silly idea, um I think that basically takes them off the table. There's no way you could take them out in a public offering if they're going to be, you know, conducting public policy essentially with private shareholder funds. So, I think it's done. Uh this is kind of the second time around for Trump. uh as you recall in his first term they did talk about it. They did a lot of work. They hired Jim Milstein to come in and you know do an enormous amount of work which is still there by the way. But I don't think anything's going to happen. Uh in fact I think what you're going to see is the GSC's are going to sell most of their Treasury collateral and they're just going to be buying back their own debt which is kind of silly. >> Yeah. Why would they do that? Well, somebody in Washington, and this has been kicked around now for months, uh suggested that if they bought back their own bonds, remember they issued these securities, that it would cause scarcity and, you know, bond prices would go up, interest rates would go down. That's how it works. >> Okay? >> The trouble is is that the GSC's, even if they stay in conservatorship, have to hedge their book. So for every dollar of bonds they buy, they're going to be selling 08 or 0.9 of a dollar to hedge the interest rate risk on the position because they don't have any capital. These entities cannot withstand losses. So they have to be very careful when they do this. >> Interesting. Okay. So as you point out for every dollar the GSC's would buy in MBS, they have to sell treasuries to hedge. So it's net neutral at that point. Is the $200 billion dollar announcement is that just theater then >> it's politics. Okay. >> Donald Trump is, you know, running scared. He worries that if the uh House goes back to the Democrats, they will impeach him on day one, which I think is a a fairly accurate assessment. Uh and he has said as much. We put the link to that uh discussion he had with the Republican lawmakers about two weeks ago and he was very forthright. you know, he said, "These people are going to impeach me." So, I think, you know, they're going to pull out every stop they can, Julia, whether it's rhetorical or substantive, to try and get enough voters to support them in the midterm elections. And let's be fair, we have a lot of things going on right now that are helpful to the Republicans. Look at Zohar Mandami in New York City, uh, with his little Marxist, uh, group. I call this Bill Delasio on LSD. uh you know that he had one of his assistants get up and start talking about white supremacy and how when white people own their own homes this is a form of racism. So it's not like Trump has no possibilities. I think he can just point to the craziness from the other party and say look do you really want these people to come back into power? But like I say, they are trying to find ways to be responsive to the electorate now and it's only going to get worse as the year goes on. >> Interesting. I feel like Yeah. You know, this year I feel like is probably going to be I feel like every week has been like whoa. Okay. So like a Yeah. So I feel like that's probably going to be We're going to have a lot to talk about on the rap. I feel like every single week >> Oh, it only gets better, Julia. It only gets better. Yeah. And you know, for me, I I grew up in a household that was heavily involved in politics. My dad was a speech writer for Nixon and Reagan. Uh and then I see what's going on today and it's it's really quite striking the difference. >> Oh my gosh. >> The lack of seriousness today and the lack of uh a sense of common purpose on the part of members of both parties. You just don't have that. You know what people on the Hill have been working on for the last couple of months? What? This legislation for uh crypto tokens. And now it appears that Coinbase has just shot the whole thing in the head. So, um, probably going to be nothing done this year. >> Okay. Well, let's stay on crypto and then I do want to go back to some housing, but you have been a critic of crypto and it's kind of lacking of intrinsic value. Do you I don't know like how do you look at the sector? Do you think it's just due for like a reality check? Are we already going through that reality check? like what are you kind of thinking about there? >> I've always told my my audience that crypto is a speculative vehicle. It's a polite form of gambling. Um if consenting adults want to do this, that's fine. It's different if you live outside the United States. I have friends who live in Asian countries in Lebanon, Syria. These are places where there's no government. And in those venues, they actually use Bitcoin as money. It's a way that they pay for things. So that's different. But you know, in the United States, Wall Street has pretty much co-opted the world of coins. Uh half of every uh stable coin scheme that's been launched in the last couple years has failed. The losses to investors have been rather significant. And you notice when Bitcoin traded off uh kind of in the fourth quarter through to today, it lost almost 30% of its value. Suddenly, Wall Street is quiet. you don't hear Jaime Diamond talking about it anymore because the volatility is so dramatic that I think it almost makes it unsuitable for most people. So that's, you know, my take on it is it's a fringe phenomenon. It's kind of interesting. Bitcoin particularly, the construction of it, I think, is is fascinating. But other than that, I I prefer gold and silver. You know, I I had a reader beating me up because I hadn't been bullish enough on silver. And I said, "Look, silver is very idiosyncratic. It has a commercial component that gold doesn't have." And you saw it was up threefold in the past 12 months. >> Where is silver today? I mean, I'm so It's just been on an absolute ter. Okay, it's a little it's a little down today. It's 88 uh50. >> It's going to correct. Okay, >> you know, there was a vicious short squeeze here. There was no deliverable silver in Chicago. So that's someone crushed then. Oh >> yes, if if you were dumb enough to be short. Yeah. >> Um but the point is is that there the demand for silver in industry plus the monetary component makes it a much more volatile metal than gold. Gold just does not have that same component. And you have central banks buying gold for monetary purposes. You don't have that with silver. Silver has kind of lost uh its role as a a means of exchange coinage, you know, for hundred years. Silver was abandoned by Germany and the United States more than 100 years ago. >> Yeah, man. For those folks who are kind of in on silver early, I'm certain >> 30 bucks or something. Yeah. >> But I've been buying the miners as well. We have gold and silver in our portfolio which we talk about with our readers. And then I've been slowly buying some of the miners. They're very small. They're difficult to buy. Meil Lynch won't let me buy them because they're penny stocks. >> Interesting. >> So you've got to be careful because they are illquid. >> Okay. All right. Um, another question just on the precious metals front. So gold up 70% silver nearly tripled. But you, what I'm hearing from you is you very much prefer gold as the long-term trade. Is there anything that would change that view for you like on silver? >> If I saw countries starting to issue silver coins, if they embraced it as a monetary metal. Yeah. But I think >> when coins used to have silver in them. Yeah, >> that's right. That's right. We used to have silver dimes. Um, I think, you know, like I say, it's it's the most interesting part of silver is the commercial demand, >> whereas gold is a monetary play. There's no reason not to do both cuz look, let's be fair, look at copper. Copper is also up dramatically this year on a lack of supply. So, in all of these metals, what you're seeing is that there is a lack of deliverable supply, which means that it's a very interesting short-term trade. That is an interesting trade because also when you think about copper, isn't copper like one of those metals? It's known they call it Dr. copper because isn't it like an indicator of the economy and how that's doing? >> Yes. >> Okay. But >> it's so important for industry. >> Yes. At least silver for industry as you point out. Okay. Um very interesting, Chris. Okay. Does it is it reflective of the state of the economy? Like how do you kind of or is that just totally not the way to look at it right now? It it is to some degree but the Chinese are the primary demand for copper. So their eb and flow which may or may not rec you know reflect economic reality. It may reflect the latest edicts coming from the Chinese communist party regarding the economy. Uh so you got to be careful because when the Chinese weigh into that market they can move prices dramatically and that is not necessarily an indication of the global economy but it certainly tells you what the Chinese are thinking about. >> Okay. I want to go back to housing um as we were talking about earlier here because I want to hear your assessment of housing, housing policy, anything being floated in the White House. Like what's You're kind of the guy for this. So like what's your assessment? I read your piece and you called it or somebody called it a bit of a you know I don't a show we could say it. >> Oh, look at that. Um it is because they there aren't any easy policy prescriptions right now. They are looking at everything and anything. Um you know rates have fallen a little bit mostly on the the news rather than on the dynamics in the bond market. You're going to see refinance activity tick up a lot this month and next month. Will that make it easier for people to buy homes? No. You know, you are seeing home prices soften in some part of the country, others not. So, we're not quite yet at that national correction that you and I have been talking about. >> Y, >> but it's coming. And that's to me, that's when you help affordability. The question is, can the Treasury and the Fed step back and allow a reduction in home prices, a 10 or 20% drop, uh, without intervening because they're so concerned that deflation is going to cause markets to become dysfunctional that they haven't allowed it. You know, remember, uh, you know, I'm older than you a little bit. Um, when I was a kid, when home prices weakened, people got an opportunity to buy a cheap house. they would buy something that maybe needed a little work. In Washington, we did that a lot. Washington was a very volatile market, both up and down. >> So, you know, we haven't seen that kind of deflation in housing prices in 25, 30 years. And that's what I think you need to see to help affordability. It's not just about interest rates. >> Okay. But do you think that the Fed or the Treasury, they wouldn't allow it? Would they freak out? Like, what is the thought process? >> They would freak out. Yes. >> Okay. Because if you look at all of the little crises that we've had over the past couple of decades, >> the key component that has caused action at the Fed and the Treasury is they're concerned that the Treasury market may be impacted and they won't be able to sell debt. >> You know, when you have big deficits and when you have to roll over those tea bills every month, uh that's what colors your thinking. Remember when Scott Bessant came into office and he was talking about issuing more long-term debt? Well, that lasted about two weeks, >> right? Right. >> And now Scott is talking just like Janet Yellen. Yeah. >> The only issue is T bills. >> The T bills. Yeah. >> Okay. So, it's like is that the bond market is kind of just controlling or dictating everything that they're doing. Then >> the Treasury market. >> Treasury market. Yes. Treasury market. Okay. What? Okay. Go back real quick. What would actually move the needle on affordability? And is there a way to do it that's like not massively? >> Let prices go down. >> Let them go down. Let's see if we can deflate 20 or 30%. Without causing the uh you know the thing to tip over. Uh because that's what the Fed did. Remember from CO through to about last year home prices went up almost 50%. >> Mhm. >> That was caused by the Federal Reserve Board. >> Yeah. >> Plain and simple. >> Yeah. Yeah. it >> the cost of co and you know what that was the result of was dropping interest rates down to zero people went out and refinanced their mortgages bought houses did all of this right but there wasn't a big supply so when you had that huge rush of people coming into the market house prices went up >> and I mean all house prices vacation homes in Whitefish Montana you know that the entire inventory of vacation homes in the United States basically got bought in 202122 and it's not like we replace these assets and build more, right? So, home building has kind of caught up. You're starting to see supply catch up with demand, but it's taken years. >> 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. Well, misery on the eights. We're not that far away. >> Misery on the eights. >> Yeah. Um I want to talk about the area that I also know you for banks because we are in bank earnings season with um the Q4 results coming out. I know you've been following this closely from the major banks. What what stands out to you from what we've seen so far from the banks? >> Well, they've done well on the Wall Street side. Trading, investment banking has been booming. Uh credit costs are still pretty stable. So you haven't seen an uptick in delinquency in credit cards and consumers generally. I will tell you that there are signs in the lower cortile of consumers. If you look at the FHA, uh delinquency is rising there pretty rapidly. So that's a kind of early indication that we may start to see some economic problems this year, probably the end of the year. But banks right now, Julia, they they're showing us a picture that's great. Uh we did a piece this week as you know talking about how banks lend to private equity firms and I think there's a problem there. Uh it's a problem that they're not talking about and that they're working very hard to conceal. Uh but that's really the only cloud on the horizon. The consumer side of the equation is still good. And you know I think the thing with banks and bank stocks is that they ran very well last year. So, some of the names that you might think of, JP Morgan and and the rest of them didn't do that well in the second half of the year. Uh the the stellar uh bank among the top four was City and they had only barely got to book value. So, you're going to see I think a little more consolidation in bank stocks because they were already pretty pricey as we went into year end. Uh I don't know that it's a great trade to be going long right now. H see that's interesting too because I feel like aren't you only in like one bank stock right now? >> I own some Flagstar. I bought it very cheap. Uh I know the management team and I think they're going to bail that bank out slowly but surely. They have a lot of exposure to multif family in New York City. Uh and that's always a big concern, but I thought well you know why not? Um, the stock was very cheap and as I say, I've known those guys for for many years and I figure they're going to do it because they got started earlier than the rest. There are some banks in New York City who have a lot of work to do when it comes to New York City apartments. >> Oh gosh. Yes. Um, you also just mentioned like when you're doing the recap of the banks that we might we're starting to see some of those delinquencies on the lower end of the consumer side and that we could see maybe some economic problems down the line here this year. >> Um, when you look at banks like how much does that kind of foreshadow the direction of the economy like from that lens? Well, mortgages are an interesting indicator because, you know, if you look at the FHA, for example, those tend to be lower income households. They tend to have to borrow more. They have low credit scores, etc. But, you know, overall, what I watch with the banks is credit cards, unsecured consumer. That tells you a little bit more about the broad population of consumers. And right now, it's pretty benign. uh the banks would like to actually see more demand for these products. But you know to me the big risk on Wall Street today is coming from the institutional investment sector. Private equity and credit are just these rancid pools of illquid opaque assets that nobody can really assess. Uh we talked about a paper that was published by the Fed of New York that I encourage your your listeners to uh to read because you know it tells you that the non-banks don't compete with the big banks. The non-banks take the money from the big banks and go off and do stupid things with it. >> That's what's causes risk. like what happens in the middle there because in the paper and everyone go read the institutional risk analyst and subscribe because it's transformed intermediation credit risk to the NBFIs liquidity risk to banks. That's the paper you're referencing. >> Yeah. And great paper by the way. I applaud the authors. They uh a couple of them are at New York University and the Fed of New York. But they really nailed it on the head because most people think that the way you analyze markets today is to think about banks versus non-bank uh financial institutions competing with each other. But that's not the case. The banks really have non-banks as customers. The non-banks get their liquidity from banks and that's why the risk ultimately goes back to the banking system. >> Yeah. Okay. You had a kind of a funny anacronym in there. P O P >> Poke. >> Yeah, that was coined. >> Yeah. >> What that means is that when some of these private equity firms can't pay their debt, they start to do what's called paying in kind. They give them more equity. And in the strange world of private equity, they consider that a new investment. They don't consider that the company is actually in default. Mhm. >> They say, "Oh, no. The investment in the company went up, so the banks will lend more." >> So when they lend more on a company like that, that's essentially headed for bankruptcy. That's, you know, principle on top of existing principle, original principle. That's how you get poop. >> P O P. Yeah. It's funny. It's an acronym that is deeply disturbing to the guys at uh Apollo and Aries and the other private uh credit shops because uh the guy who coined it is a very wellrespected risk manager. >> Yeah. Nam the plumber. Um okay. So real quick Chris on this whole private credit thing and it's interesting to me like because when it's what's happening in the middle and we probably don't even really talk about that part. It's just >> Can you just explain in pretty much layman's terms the mechanics of this, how it kind of works and why it's so concerning? >> Well, banks lend money to the sponsors of private equity firms, but they're private. Nobody has any idea what these companies are worth because they are private. So, the bankers can't go in and do diligence on them. They take the word from the sponsor and say, "Oh, well, this company is worth XYZ." And so, the bank will lend on that basis. It's blind lending, Julia. It's the kind of lending we shouldn't allow. >> So, we don't get to see exactly what's going on then. >> Oh, no, no, no. See, and remember the heads of these >> Yeah. The heads of these big credit shops were all arguing over the past couple years that private markets are better. No, public markets are better. If you look at Harvard and some of the other big endowments that have gotten their clocks cleaned in private equity, they should have been in the public market. They would have done much better just buying S&P 500 futures. And that's why I always tell my readers, most of your portfolio should always be in public markets. >> Yeah. Okay. So, how did we get to this? Like, where did this all come from? >> Too much money chasing too few opportunities. Julia. >> Okay. Do you think this is a major risk then? And it's just kind of a ticking time bomb. >> I think you're you're going to read about it this year more and more. >> Okay. Well, that's one of your predictions for 2026. Um, >> yes, it is. >> All right. What do you think we're going to read about like >> banks taking losses on private equity investments and also lending to private equity firms? You're going to hear more about losses to investors who are desperately trying to get out of these assets. When you when you see private equity firms selling portfolio companies to one another, it's like NFL coaches, right? Everybody fires their coach and goes off and hires somebody else's coach and they're churning the portfolio. They're not really doing anything positive. It's just musical chairs with assets. And that's what I think you're going to see more and more of uh this year and next year is that the people who are trying to buy time with some of these busted companies that can't go public, can't monetize the investments that they made privately are are going to end up having to take the loss. And it's quite um concerning because you have big banks, not just JP Morgan, but Wells Fargo has jumped into this with both feet. PNC, City, they're all involved and this is the fastest growing part of their balance sheet. >> That's the issue. >> Okay. Something to watch for this year. Um gosh, like I said, I feel like every week is like, wow. Okay. With the headlines and we record on Fridays and air every Saturday and so it's like, oh, the weekend news has been crazy, Chris. All right, I got to ask you this. Um, on Sunday evening, Federal Reserve Chair Jerome Pal revealing he received a subpoena from the DOJ. What do you make of it? >> That's politics. He The Trump people have mishandled the Fed and Jerome Powell. Powell's not a great Fed chairman. He He's a a Fed chairman that you could criticize for many reasons, but, you know, frankly, the Trump administration should have just quietly let him go into retirement. Uh instead they've been attacking him publicly. This whole thing with the Department of Justice is kind of thuggish strongarmmed tactics that are not going to work because what what's happening is we're turning this guy into a martyr. You know who said this on X the other day? Larry Cuddlo for God's sake who's one of the strongest supporters of President Trump. So I think they they really misjudged how they should handle the SE central bank. I think Powell is going to remain on the board when his term as chairman is over. He's he can stay until 28. And why not? He's going to keep that seat away from President Trump. Uh Steve Myin is going to have his term end. He he took another governor's term. So Trump is going to get to appoint a new chairman. My guess is it's going to be Kevin Worsh at this point. But the question is, will the Senate confirm his choice? because people in the Senate are very upset with the way he's handled uh Jerome Powell. >> Oh, what happens if they don't confirm? They have to put a different choice in front of them. Like what's >> No, they could appoint Mickey Bowman as chair on an acting basis because she's already been confirmed by the Senate. >> So, you you know, you can do that. There is a legal opinion that that states that, >> but that's not optimal. And if President Trump loses the midterm elections and there are Democrats controlling House committees, this whole thing is going to be over. >> Yeah, definitely. Um, that's why this year I think it's like midterms are going to be dictating pretty much every move we see, I feel like. Right. I don't know. >> Uh, yeah, I think so. The Republicans are are kind of running scared. They challenged the redistricting in California, for example, and they lost. >> Uh, they won in Texas. So it's a it's a calculus of pennies. They're they're trying to assemble enough wins that they can keep control of the house. >> Okay. So just before we leave the Federal Reserve as a topic, you've talked about and have advocated for like this more decentralized model and focusing more on sound money. How how would you change the current system and what risk do you see if we stick to like just the status quo? Well, I think Kevin Worsh is going to do precisely this, and I think he can get confirmed by the Senate. He wants to get the Fed out of the central planning business, plain and simple. He wants them to go back to their statutory responsibility, and he would probably focus much more on inflation than he would on job growth. There's no way for the Fed to really encourage job growth uh with interest rates. That has been the case for decades. And other than getting Congress to legislate on it, it's tough to make a whole lot of changes. But for example, Julia, the portfolio uh with a chairman wars, you're not going to see them buying lots of bonds. Quite the contrary. Now, the Trump administration, by the way, we didn't talk about this with housing. There have been some discussions in Washington about the Fed starting to buy mortgage bonds again, which has been a disaster financially. Uh but that just shows you how desperate some of the Republicans are when they look at the midterm elections. Anything they can do to show themselves to be responsive to the issue of affordability is being considered. And I mean anything. >> Okay. There's this conversation that they the Fed could resume MBS purchases. Um but do you see do you think that's actually going to happen? Like under like what scenario would that actually happen? Um, well, it's governed by the board. It's not governed by the Federal Open Market Committee. So, you would have to get a majority of the board of governors to approve it. I don't think it's going to happen because, as I say, they've lost so much money on this little hedge fund that Janet Yellen and Jerome Powell started. Um, but, you know, if the president is pushing hard and he has his man in the chairman's chair, they may try. See, because the Fed doesn't hedge their book. when they went out and bought $3 trillion in mortgage securities during COVID, they pushed interest rates down dramatically. And that's uh that's the difference. >> If they've like lost all this money running this little hedge fund, like what isn't that kind of ironic? >> Yeah. I I think Wor actually would probably swap the mortgage paper that the Fed owns today. It's about $2 trillion to the to Fanny May and Freddy Mack and then uh take T bills in return. Get that from the Treasury cuz he wants to see the Fed go back to the classical way of managing their assets which is to be really short. They want most of their investments in securities to be one year or less. >> Yeah. All right. We have just one viewer question. I actually forgot to write down this person's name, so I can't give them a shout out by name, but she would like to know, are you still bullish on NLY Italy at this price level? And could you explain your rationale? >> Um, I own Analy. I continue to add to my position. Uh, my basis in Analy is about 08 of book value. So, I don't buy analy for price appreciation. And I would say to all of the viewers, REITs are not a good vehicle for stock price appreciation. They're a vehicle for income. So, I own analy because they throw off mid- teens yields. That's really the point. Um, I don't play it for price. So, I'm kind of indifferent to the short-term price movements. I like the model a lot. As I think I've said before, the whole crew there at Analy is one of the best REIT management teams in the business. They own mortgage servicing. They're they're very astute. So, you know, that's my attitude. I I don't think any of the REITs are a good investment if you're looking to make uh money on an appreciation in the stock price. They're there really for yield. That's the whole point of a REIT. >> And again, for the folks watching and listening, you can submit questions. Um we love to do viewer questions every week. So, shoot me an email at juli@juliaro.com or just drop a comment um below. Chris, we love that you are so generous. >> You can bug me on X if you want. >> You can bug them on X, too. RC Whing. >> Yeah, I I All the questions I get from my viewers, I put up on X. I had somebody beat me up the other day cuz I wasn't bullish enough on silver. So, >> what are you going to do? >> Oh, man. What are you going to do, Chris? Again, we love this. It's so much fun. We're going to see each other in person for an in-person taping of the rap next week, which will be really fun. Um, before I let you go, let's leave this audience with some parting thoughts. Anything that you'd like to leave them to think about, maybe something you're even thinking about for next week and let them know where they can find you. Support your work. Everyone, go subscribe to the institutional risk analyst. Chris, floor is all yours. >> Well, no, thank you, Julia. I I think we're headed into an interesting year. Uh, we may or may not see interest rates cut again by the Fed. I do think you're going to see some changes in where investors are focused on Wall Street, not so much tech uh as other sectors, maybe more defensive sectors, and they are definitely focused on foreign markets. So, I think you're going to see a weaker dollar and you're going to see some musical chairs on Wall Street in terms of equity allocations. The banks, eh, they're going to be kind of unchanged. I think there's not a lot of upside in most of these names, but uh you know if you guys have any questions, we're always happy to hear them. >> Yes, we are. Chris Whan, chairman of Whan Global Advisors, author of the institutional risk analyst blog. So wonderful to spend time with you every week. Really appreciate it and looking forward to seeing you again soon. >> I know. Dinner with Jim Rickards. Imagine. >> Oh, that is going to be legendary. Okay, now they know. All right. Well, I'm I'm having dinner with Chris and Jim Richards, everybody. and we are going to tape an episode with Jim. So, tune in. >> I think we have to get a Lotus Club picture and show everybody. >> We have to. And we have some other guests who are gonna join us, too. But this is I'm I'm grinning because this is like dream dinner. We so fun.