Whalen: Bank Outlook, Fed Policy Losing Efficacy, Rate Hike May Be Coming, Private Credit Defaults
Summary
In this episode of The Wrap, Chris Whalen reveals bank incomes are up but the real story is the trading side of the house driving …
Transcript
Deposits are growing faster than assets generally. And the difference is going into trading assets. That was the big eye openener I think for a lot of people. The deposit side grew enormously almost 5%. And that's quite unusual in a single quarter. And what it tells you is that there's a lot going on in the trading side of the house. So it's Wall Street versus Main Street. Julia Welcome back to this week's episode of The Rap with Chris Whan, where we break down what's happening on Wall Street, Washington DC, and everywhere in between. Chris, great to see you as always. >> Hi, Julia. We've got to talk about this week's edition of the rap which you title bank income up stocks sideways gold and silver lower and as you note the FDIC released Q1 data showing bank incomes up again yet financial stocks are sideways to down with a few exceptions. So what is going on? What's driving the divergence here? Especially with that 10-year yield at 4, four, 5% and rising unrealized losses on securities portfolios. >> I think the big story with banks, Julia, kind of goes to Jamie Diamond's comments this week. He he guided that their trading results are going to be better than they had initially told analysts, and that's the case. So, it's really the trading side of the house. uh interest expense fell last quarter but so did income. You know, we had a bit of a rally in the first two months of the first quarter. So, it was a weird month. You know, the first two months people were making a lot of loans. The mortgage guys were really happy. We were heading down into the fives and then, you know, you had this Iran war and a lot of other noise coming out of the political side and all of a sudden, you know, rates are backed up half a point. The on the run uh Fanny Freddy Jinny is a 5 and a half right now which means that they're writing 6 and a half% loans. There's usually about a point difference between the MBS and the loans that they're they're selling in the pools. So, you know, the industry today as we see it is well over 6 and a half for a 30-year fixed rate mortgage. >> And what's that going to mean for them? Well, you're you're going to still see some loan growth, but it's mostly to, you know, the usual suspects in private credit, private equity. The rest of the loan book across the board, consumer, commercial loans, commercial real estate, you know, you're looking at singledigit growth rates. Deposits are growing faster than assets generally. And the difference is going into trading assets. That was the big eye opener, I think, for a lot of people. Uh, in fact, I was emailing with Mark Xandy today, sharing some of that data with him, is that the deposit side grew enormously, almost 5%. And that's quite unusual in a single quarter. And what it tells you is that there's a lot going on in the trading side of the house. So, it's Wall Street versus Main Street, Julia. >> Okay. So, that's the unusual bit is the trading side of the house. >> Not that unusual. It It's getting to be more and more usual to be honest with you. H. So do you think we should expect that going forward? >> The balance of this year, I think the larger banks, your top 10 are going to be able to make hay one way or another. Um, they do have a lot of credit out there. We credit my friend Mara Rodriguez Fadares who was talking about how much private credit exposure the banks have and the loss rates which are quite eye opening. There were almost double digits last year. And when you see a portfolio of credit that has a double-digit loss rate, that means it's like, you know, a single B uh triple D kind of rating, uh that gives you a sense for the quality of these loans. They're pretty poor. So, you know, the lending of banks to non-bank institutions, private equity funds, etc., is definitely subprime and much of it is on a nonreourse basis, which means the bank can't go after them when they default. uh you know last week we talked about the fact that city and black rockck had done a deal so that they could make loans in Europe to the same you know cast of characters and I think ultimately this is going to hurt the banks the banks are going to take losses when we do inevitably see a correction in the world of AI you know as we wrote this week Julia is Micron Technology a company I love by the way I've been following them for a long time worth a trillion dollars or maybe the dollar is not worth what we thought it was I don't So >> maybe we're just going to get used to that like trillion dollar market caps or something. Um >> well it's inflation. That's what it is. >> I remember when it was like a headline um was it Apple that hit and everyone was like wait this was like years ago we were waiting for it to hit a trillion. >> I know. >> Um >> not so exciting anymore. >> Wow. Um there's an Yeah, as you point out some evidence of inflation. Um, you also wrote in the rap uh that Fitch Ratings reports that US private credit default rate hit a record of 6% in April. >> Yes. Which is right. Is this right? 10 times the default rate for US banks. Okay. Um >> yeah, the bank default rates are very low um pretty much across the board uh both on the consumer side and the commercial side. You know, when you have as much asset price inflation as we've seen in the past decade and more, Julia, it gets rid of a lot of sins. And so, until you see those asset prices fall, credit looks like it has no cost. And the banks are responding accordingly, the private equity guys, too. But I was talking with a very interesting guy uh today uh in in the Far East about this and he said, "Chris, when you see the non-banks taking the lead in lending, you know, that's kind of the end of the cycle." And I I think that's right. So the banks are letting the non-banks lend their money and eventually they're not going to do that anymore. >> Okay. And that also just ties back to when you were talking earlier like a lot of this has been subprime as well. >> Oh yeah. So, and you think it's still going to hurt the bank? Like, who do you think is most exposed? >> Well, in terms of sheer amounts, I mean, the biggest is JP Morgan, but City, Wells, PNC, they're all in there. Goldman has got a significant stake. Goldman has gone out of their way to point out that their default rates are low, but you know, as we like to remind our readers, um, in fact, we're doing our bank book for Monday this week, looking at the first quarter data. uh Goldman's got a 10% yield on their loan book. When you charge people 10%, that's not necessarily a good advertisement. You know, the the comparable number from JP Morgan is like 6 and a half. So, you know, you have to scale the price of your loans to the credit quality of your borrowers. That's how you basically have to do it because you know that some of them are going to default and the ones that don't default are going to subsidize the ones that do. So, if you're a Goldman Sachs and you lend to a lot of interesting companies that may or may not be rated publicly and have public equity and other sources of liquidity, you're going to have a higher default rate than a Jamie Diamond because he tends to pick the better credits because he can he doesn't have to pick the credits on the bottom half. Uh, and you see that with Morgan across the board in all the markets where they operate, they really don't touch the bottom half of the market. They don't care and and they don't have to care. What about the um kind of reversal in the low rate environment? How does that impact things here? >> Well, for banks that still have a lot of legacy low coupon paper like the Bank Americas and the Schwabs, um you're going to see unrealized losses rise because they can't sell these securities without taking a loss. you know, if you're still sitting on a GIME 2% coupon that was issued during COVID, that security is trading in the low7s, uh, and it tends to lock up parts of the balance sheet, makes it illquid. Nobody on the street wants to own that security because they're paying more for money than they're getting on the coupon on the bond. So, it it it's kind of a bit of an orphan. Um, I think also over time you're if we see rates stay where they are, Julia, customers are going to have to get high uh used to higher rates. So whether you're buying a home or you're a business borrower, you're going to see a 4 12% 10-year bond yield reflected in the price of your credit. Now, I still think that Kevin Worsh is going to try and shrink the Fed's balance sheet despite what's going on on the long-term end of the yield curve. uh and he may be able to get some leeway in terms of lowering the target for Fed funds because let's be fair, what have we proven in the past quarter with Jerome Powell and Janet Yellen and Ben Bernanki? The Fed doesn't control the long end of the yield curve. They never have. And it's only progressive nonsense on the part of certain Fed governors that allowed them to even try. We listed all of the QE in the blog today uh just to let people see how absurd some of the things the Fed has tried to do really were. Uh and when you look at it, it's mostly been Bernanki, by the way. QE1 through QE3 was his. But Yelen was there. She was encouraging the Fed to buy longdated securities, thinking that they could force down long-term interest rates, and it doesn't work that way. The bond market dictates long interest rates. So I think you know Wars I think will be a breath of fresh air. He's got a tough uh situation ahead of him. We'll see if we get a settlement in this war. That's the big thing. If they can actually settle this war in the Persian Gulf and reopen the straight of Hormoose then that changes a lot. But we're still going to see much higher inflation this year. Julia, I haven't changed that prognosis. >> Double digits still. Yeah, I think so because we're going to see shortages in some really important commodities, things like fertilizer for the farm for example, and that cost is going to get passed through consumers. Consumers are already screaming. Uh consumers are consuming savings right now at a frightening rate. And I think that's in part because they're trying to maintain their standard of living. Uh even though the prices at the grocery store are up 10 or 15% depending on what you look at. So, I I think Americans were under a lot of pressure this year, and you're going to see that in the midterm elections. We we kind of talked about that a little bit in the blog. >> When the price of gold and silver was rising faster and faster by the day, people kept asking if they've missed the boat. They thought that gold and silver were too expensive. Well, if you were looking for lower prices, here they are, and they might not last very long. That's why I'm still a buyer of Precious Metals and why I encourage you to get your free information kit from our partners over at Goldco. They're the number one gold and silver company in the country. They have over 8,000 five-star reviews. Plus, they have the best gold and silver offer in the business, hands down. And right now, they are offering a 10% bonus in gold or silver on qualified orders. Go to goldco.com/thetherrap to learn more. Or you can call 855-573817. Go to goldco.com/therap or call 855-573817 to learn more. You mentioned the history of QE and um over the years uh one through four. When you look at when you look back at those policies, what do you think has been maybe one of the worst impacts of QE? >> I think the most striking impact is on housing. the the actions of the Fed to buy those mortgage back securities forced interest rates down for one to four family homes. So, you already had a bit of a bias and I can understand why they did this. You know, you wind the clock back to 2010 when I was working uh for a big mortgage serer out in California and home prices were flat on it on their back. Uh you had no bid for foreclosed properties and people were trying to figure out what to do. Finny and Freddy had run for cover. So all you really had was Wells Fargo and Gene May supporting the residential market. So by encouraging housing, and that's what the Fed did very explicitly, Matt, it's way outside of their mandate. Um they subsidized interest rates. They forced them down. And by 2012, 2013, you started to see the market for foreclosures clear out and home prices started going up and they never stopped. And then when you had COVID, that was like, you know, running out in the backyard for the trash fire, right? And throwing a uh a bucket of gasoline on it because, you know, home prices accelerated over a period of years double digits, you know, so that by the time we get to the end of 2025, home prices in many markets, Julia, were up more than 50%. That's crazy. But that's that's the policy actions the Fed took. I think housing is really the headline of that period. Did it impact other sectors? Absolutely. Commercial property, uh, the general tenor of balance sheets, right? Because when when rates are really low, asset prices go up. That's the math. We included the formula for cap rates at the end of the blog just to illustrate this for people. >> Yeah. The housing one, it's like that's the one we all see. >> It has huge political consequence. That's the thing. For the Fed to do this without explicit instructions for Congress, I think illustrates the problem that Kevin Worsh really wants to address, which is that this is an agency that has a largely progressive coloration. Uh that's out of control. They think they can do anything they want because they don't believe the Congress is going to reign them in. Uh but who knows? I think that may actually come. Congress needs to pay more attention to the Fed. They should have a committee that just does that. But you know, members of Congress have a variety of agendas. So, >> well, they should watch the rap every Saturday and listen and learn from you, Chris. Um, >> yeah, we'll see. >> Let me ask you this because in the rap, you had a line that got my attention. You said we may be closer to QE5 than be than Bessant knows. >> Yeah. He had made a point of saying he didn't think the Fed was going to restart large purchases of securities, but you know, when I heard him say that, I just kind of grimaced and and thought, "Oh, yeah, you may regret saying that." Um, I think the Fed is inevitably going to have to pick up the pace of purchases of Treasury securities. They're going to let their mortgage book run off. And I still think there's a good chance that Kevin Worsh is going to swap the mortgage securities that he owns with the Treasury to get Treasury securities because he wants to clean up their balance sheet and kind of put the the progressive experimentation of Janet Yellen uh behind them. U but you know in Washington it's still fantasy land. Everybody wants to pretend that we don't have these big budget deficits. But it's clear when you look at the numbers that the Fed has to grow their balance sheet because the federal debt is growing. There's a direct relationship between the amount of debt, the Treasury's cash account, what we t uh call the Treasury general account or TGA, and in bank balance sheets. Those are the three big factors that go into the calculation of reserves. And if the debt is going to keep growing as fast as it's been growing, then the Fed has to grow, too. There's no way to get around it. The Fed's balance sheet often comes up. It makes me wonder like um >> a cocktail party channel. >> Would they be um I was like would they be fired for their performance? >> Well, they should be. I mean, they you know, I think we should have to hold governors a little more accountable for their decisions. I know they want to have a certain degree of secrecy and privacy for monetary policy decisions, but you know, deciding to run a hedge fund and thinking that you can dust off the work of James Tobin and engage in yield curve control is absurd. We've just seen the Bank of Japan try to do that for over a decade and they have failed miserably. So why did the Fed think that they could do that? Because the result was losing hundreds of billions of dollars for the Treasury. And I I do think that's something that Powell and the other members of the FOMC should be held accountable for. >> Um okay. Well, new leadership at the Federal Reserve under Worsh. >> Yeah. >> Any expectations around um what might happen with the Fed funds rate? Is there potential for a cut or a hike? >> I I think if you held a vote right now, you'd probably have a majority to raise the Fed funds rate. Um, but as I said earlier, you know, we talked about this last week. The Fed doesn't control the war in the Persian Gulf. They don't control oil prices. They don't control anything like that. So, if you think that throttling uh economic growth by raising the Fed funds rate what, a point, two points, you know, you have to raise it a lot to get a a reaction is going to somehow force inflation down. That's a rather Byzantine, you know, medieval perspective that I didn't think we still had in this country. You know, in the 70s we did stuff like that. They stomped on the brakes and raised interest rates and the economy went into a recession. I don't think politically we could do that now, Julia. Um I I think the politics of that would be horrendous. So, I'm hoping that wiser councils are going to prevail and Wars and the other governors are going to realize that the war is beyond their control. There's not much they can do about it. Shrink the balance sheet. That's tightening by the way. That that would be a good start rather than changing the Fed funds target. And then maybe, you know, fall, even the end of the year, if we get a deal and we start to see, uh, you know, results in terms of repairing the damage to productive capacity in the Gulf, which is what we're really talking about here, right? Um, then you can make an assessment. But just to raise interest rates now in reaction to the higher inflation numbers, I think is silly because they're going to have to reverse themselves. How long do you think they could do that? a year, you'd have Congress calling for their heads. >> Yeah. Is your base case still stagflation? >> Yeah. Less growth. If we see long-term interest rates remain elevated, what's going to happen is spreads are going to widen. Right now, if you look at spreads for corporate debt, they're as tight as they've been in five years. There's so much demand out there for paper. Julia, I I can't tell you how many calls we get from private equity funds who are looking to participate in different markets, even residential housing, and they don't want to, you know, rent houses and buy them up. They basically want to do fix and flips. They they have short-term strategies, but the amount of money is mind-boggling. So, that's why spreads are so tight. There's a lot of demand for paper. However, that could change. And as that does change, I think you're going to see funding costs for private companies go up and that's what slows down growth. When when spreads are tight and companies can go out and raise money in the bond market, you get economic growth. That's why our economy has done so much better than economies around the world. We have a bond market that works. Uh but you know when you look at spreads it tells you how much inflation is in the system and how much demand there is out there right now for paper. It's striking. You know when you look at banks think about the fact that most of the big guys 20% of their book rolls off every year. So not only do they have to make new loans but they got to replace the stuff that they're losing. You know somebody like city or JP Morgan they have an average life on their book inside of five years and they manage it that way. It's it's less risky. But that means they have to go out and make new loans. And so the competition for big assets that move the needle at a JP Morgan, a $2 trillion bank, uh, is intense because you have private equity funds, insurance companies, countries, you know, corporates with too much money. You can Berkshire Hathaway with trillions of dollars sitting in the bank. They all need earning assets. And so it's interesting to me that the inflation in the system is very evident in those those asset prices. You know, that's why commercial real estate's been coming back to some extent. >> It's still a bit harsh. So yeah, it depends where you are. >> It's a case by case kind of thing. the private equity thing you mentioned like the fix and flips as an um example like they're just looking for any sort of opportunity to put this I guess a lot of excess cash to work >> looking for any sort of yield. >> I'll give you an example. Um right now you know you had that legislation that was proposed on Capitol Hill that would have prohibited institutional investors from buying residential homes >> for rent. Um, but the government is sitting on 15,000 houses that they need to dispose of. These are houses that have come largely from reverse mortgages where the borrowers died and the note is sitting there. But for political reasons, they stopped the auctions. So, everybody's waiting for these auctions to restart. And those houses will be sold into the market. These investors do not want to rent these houses. That's a false narrative that we saw the Democrats propagate on Capitol Hill. And a lot of Republicans went along with it. They thought, "Oh my god, you know, the politics of this are awful." And they're right. But the truth of the matter is the investors who put money into these strategies basically want to buy the house. They have uh a serer working for them. They fix it up. They make sure it's in decent condition to sale, which they have to do. Uh make sure there's no probate or anything else because remember these are reverses. you had retirees living in these houses. Uh make sure the family doesn't want the house, which sometimes uh is the case. And also sometimes there's money on the table that should go to the family or to the estate. Uh and so you have an opportunity here to hit a home run for the Bush uh for the Trump administration. But you know, the politics of housing and affordability have just been daunting uh going back to last year. >> Yeah, the politics of it for sure. Um, it's interesting you Well, I bought a home and people know that I'm trying. Thank you, Chris. But I'm trying to, you know, uh, fix it up and book vendors for various things. >> Oh, yeah. >> And >> I've kind of noticed there's some private equityowned various types of services, and I'm specifically screening out to avoid the private equity owned and look for the momand pop businesses to work with. >> Yeah, I would agree with that. uh private equity has too much money to invest. So they have been rolling up every kind of service provider you can think of. Plumbers, electricians, >> dentists, oncologists. I mean it it's incredible. And they screw these businesses up terribly. Uh and then eventually they'll sell them. So that's what private equity is for. Julia. >> Yeah. I wanted to make sure my dentist wasn't private equity and tell me I had a bunch of cavities or something and like come in and get your cavities fixed. >> That's right. Don't be following you around. >> Now, you can usually tell like my eye doctor in New York got bought by a private equity shop and it was a good trade for him. He didn't have to sell the business. Um, but my god, they went crazy. They started sending me all these, you know, emails and saying, "Oh, you got to make an appointment. I already had an appointment." So, when you have a private equity shop take over a business like that, if they start behaving crazy, that's a pretty good indication of what's going on. Yeah, definitely. Um, Chris, we have a couple of viewer questions for you if uh you want to get into it. All right, this one comes from Robert. >> What does Chris think about holding shortterm TIPS through 2026 as part of the non-equity portion of an investor's portfolio? If not, what are the other alternatives? >> I I don't think TIPS are really reflecting the true rate of inflation. If you look at TIPS right now, they're telling you inflation's going to be 2 3% next year. Uh I think you're much better off uh getting into a fixed income investment. You know, I own Anley. There's a number of other REITs that own government insured mortgages. Uh there are even some interesting corporates out there that would pay you several times what you're going to make on the tips. I don't think the tips are a good shelter for inflation right now. Timothy uh writes, "Many of the major US cities and states are becoming pinched with revenues declining due to relocation and tax bases shrinking. Do you see increased risk of municipal bond default or restructuring resulting in borrowing costs going higher for those types of investments? Recall Orange County and New York City." >> Yeah. And New York City today. Um I I guess it's a case byase uh analysis you have to do. If you live in a certain jurisdiction, you have tax advantages for owning their debt. On the other hand, you got to realize that municipal debt, both state and local issuers, is not a very well disciplined market. They tend to take their disclosure obligations with a a certain degree of casualness. And I I would just be very careful about which names I own. You can even have names in the same state that are better or worse. You know, Illinois, for example, uh New York is another one. I would look at each issuer and make your own decision about the credit quality. Um you know, it's it's a generic problem that question addresses because yes, there are many states that have been shortfunding their pensions, for example, in order to maintain uh spending. New York is a classic case in point and eventually they're going to get caught. Illinois's already got a terrible problem with this. So, I do think that there are states that have been losing population and particularly losing older uh residents who have a lot of income and a lot of assets and you're already seeing, you know, the billionaire taxes and everything else being proposed around the country. But that's not going to fix it. Eventually, these blue states have to become more competitive, and that means they've got to shed some of the progressive uh language and and try and be a little bit more evenhanded in the way they deal with business. >> This one comes from Kefir. I'd love to hear Chris dig a little deeper into why higher inflation won't drive down the cost of gold. Also, what are his views on the strength of the dollar with current oil prices for for longer or even a slightly decreased oil price into the second half of the year? >> I think we mentioned it. Yeah, energy prices have been bouncing around depending on what news we've had out of the Persian Gulf. If you think of it, when we have higher rates on government bonds, for example, that competes with gold. when you when you have the ability to invest in something that you know is going to be paid back at least in kind. So you know a treasury bill or a bond or what have you. If the rates higher then it does compete with metals. The only thing I would say is that my basic thesis on precious metals both gold and silver is based on two factors. Number one scarcity and number two central banks are buying it to uh use for reserves. uh silver then has the additional factor of commercial demand for technology. There's nothing you need to make in the world of AI that doesn't involve silver in one way or another. Or as one publication I love to read, Silver Academy put it, think of the silver that's been vaporized this year in the Gulf War and it's not coming back. You're not getting that metal back. It's at the bottom of the ocean or you know in some valley in Iran. So all of the weapon systems, the technology, everything else that drives the modern state requires certain inputs and one of the biggest is silver. So I, you know, I think you always have to compare the fiat world with the precious metal world. The precious metal world is about maintaining real value. But if you have high yields, we wrote about this in the blog, that piece we did on the virtuous barbell, then you should take advantage of that, too. It's a matter of balance cuz you need fiat to pay for your groceries, right? You need fiat to pay your rent or your mortgage or what have you. And what you want to do is look opportunistically for income in the world of bonds. And also, if you see an opportunity in stocks, you take it. I mean, look at the craziness in AI. Who would have thought that some of these stocks would perform the way they have? >> Yeah. Who would have thought? Um, >> well, it's it's a momentum market. It's really hard to predict. Sometimes we see these opportunities and we write about them. Other times we don't. I think the AI opportunity, the build spend that's driving a lot of these stocks. Now, it's not about profitability. It's simply the fact that people believe that everybody is going to spend a lot of money with Micron, a lot of money with AMD and other producers. Uh, and they're correct. Will will AI be a profitable endeavor down the road? It's hard to say. I think mostly it's going to be a giveaway, but that's just me. >> I have one more question for you. >> Um, this goes back to the Fed and now that we'll have Wars at the next FOMC later in June, coming up in June. Um, we're almost in June, everybody. >> So, we know that President Trump has been pounding the table for a while now and criticizing Jerome Pow because he wanted lower rates. >> Yeah. But it seems like the prospects for lower rates are just disappearing at this point. How do you think that one's going to how do you think that one's going to play out if we don't get cuts? >> I doubt the committee is going to take action as a new chairman is being seated. So I wouldn't expect them to do anything in June. Although I do believe they will remove the language from the statement that alludes to a cut in the future. A lot of the governors wanted that removed in the past meeting. So, I think that's a given. Um, I wouldn't be surprised to see a majority of the committee in favor of a rate hike in July. And the question is, are they going to take our advice, which is wait and see, or are they going to try and symbolically address inflation by raising the suggested target for the Fed funds rate? You know, one of the things we wrote about in the blog this week is the fact that policy has got less and less efficacy. It has less and less impact on the markets. So, I hope the Fed is not going to try and address the inflation that's coming from energy and other sectors due to this war because they're going to fail. You know, whenever you take policy actions, you want to have a reasonable belief that you're going to get the result that you're looking for. And I don't think raising the Fed funds rate is going to do it. If you want to make a big statement, you change the reserve calculation and you say to people, well, we're not going to buy any more Treasury bonds for a while. We're going to let the portfolio run back down to where it was back in 2010 when Uncle Ben Bernani, you know, revved up the printing press, right? That's a tightening. And I think that symbolically would be at least something that Wars can throw on the table in his conversation with the other governors. The markets may or may not understand this because most economists frankly never think about the balance sheet even though it's the most important part of monetary policy today. So, you know, that's how I see it. I I think there will be a a clamor on the committee from some of the more conventional thinkers for an increase in interest rates. But you got to remember these economists are not geniuses. They're they're just normal people and they're trying to do their jobs and they've been taught that changing the Fed funds rate is how you address inflation. I don't think that works the same way it used to work 10 years, 15 years ago. And that's why we need to be I think careful what we do because you don't want to lose credibility. If the Fed acts and inflation keeps going up because of these external factors we've discussed, I don't know what they've accomplished other than reducing their own credibility. >> Yeah, maybe we just need a different a different playbook here, Chris. Um, >> well, you know, I can always commute to Washington. What can I say? >> Oh, I'm saying, you know, you'd make a great Fed chair one day. >> I'll see if I can buy my mom's old house in Georgetown. You know, we got the Westies. We had two Westies when we lived in Georgetown. That was great. Very popular. >> I love that you love Westies. I'm a Westy household. Well, my dogs part Westy, but they're they're just sweethearts. Yeah, we love them. Chris, um, not only do we love Westies, but we love doing this with you every single week. It's so much fun. Uh, what are you thinking about next week? What are you going to be following? >> Well, we're publishing our bank report Monday. I'm going to have fun this weekend playing with numbers. It's actually some of the most fun stuff I do. Um, the war is still top of the heap. Uh, the equity markets, when are we going to see a correction? This AI thing is getting really silly. This is what you call a crowded trade on Wall Street. A really crowded trade. Uh, the other sectors are not moving that much. Uh, banks, for example, are not moving that much. We're going to look at that in some detail on Monday. So, you know, we have a very lopsided market right now, and that does worry me. I'm really watching the 10-year because that's vital for the housing industry. You know, we're kind of a little bit below 4 1/2, but I got to tell you, that move over the past several weeks really clobbered a lot of mortgage lenders, and it totally changed the conversation. We're we're talking about a lot of consolidation now. We could see three, four new M&A deals in housing announced between now and the end of the year. And I mean big deals. Top 10 lenders merging. >> So um >> wow, there's a prediction. >> Well, they don't have any choice. You know, if you don't have the volumes, you got to reduce expenses. And a lot of people, we talked about this when we were talking about United Wholesale Mortgage. They were keeping capacity ready because they thought we'd get a couple rate cuts and yee-ha, right? We'd go out and make a lot of loans. That's not happening. So, we have just the opposite scenario. and the managers of these companies have to make a decision. Uh it's a difficult decision. We've been working a lot in the distress market with a couple of our partners. So we have a be you know bird's eye view of what's going on here. Delinquency is rising uh and people are desperate to generate revenue. They really are. >> Well Chris, um great seeing you as always. Uh folks, uh you can head over to uh goldco.com/thetherrap or you can give them a call at 855-573817. We appreciate them being partners of the show and Chris, great to see you. I hope you have a wonderful weekend. Looking forward to our conversation next week. And everybody, uh thanks again for your support of the show. And that's a wrap. See you all next
Whalen: Bank Outlook, Fed Policy Losing Efficacy, Rate Hike May Be Coming, Private Credit Defaults
Summary
In this episode of The Wrap, Chris Whalen reveals bank incomes are up but the real story is the trading side of the house driving …Transcript
Deposits are growing faster than assets generally. And the difference is going into trading assets. That was the big eye openener I think for a lot of people. The deposit side grew enormously almost 5%. And that's quite unusual in a single quarter. And what it tells you is that there's a lot going on in the trading side of the house. So it's Wall Street versus Main Street. Julia Welcome back to this week's episode of The Rap with Chris Whan, where we break down what's happening on Wall Street, Washington DC, and everywhere in between. Chris, great to see you as always. >> Hi, Julia. We've got to talk about this week's edition of the rap which you title bank income up stocks sideways gold and silver lower and as you note the FDIC released Q1 data showing bank incomes up again yet financial stocks are sideways to down with a few exceptions. So what is going on? What's driving the divergence here? Especially with that 10-year yield at 4, four, 5% and rising unrealized losses on securities portfolios. >> I think the big story with banks, Julia, kind of goes to Jamie Diamond's comments this week. He he guided that their trading results are going to be better than they had initially told analysts, and that's the case. So, it's really the trading side of the house. uh interest expense fell last quarter but so did income. You know, we had a bit of a rally in the first two months of the first quarter. So, it was a weird month. You know, the first two months people were making a lot of loans. The mortgage guys were really happy. We were heading down into the fives and then, you know, you had this Iran war and a lot of other noise coming out of the political side and all of a sudden, you know, rates are backed up half a point. The on the run uh Fanny Freddy Jinny is a 5 and a half right now which means that they're writing 6 and a half% loans. There's usually about a point difference between the MBS and the loans that they're they're selling in the pools. So, you know, the industry today as we see it is well over 6 and a half for a 30-year fixed rate mortgage. >> And what's that going to mean for them? Well, you're you're going to still see some loan growth, but it's mostly to, you know, the usual suspects in private credit, private equity. The rest of the loan book across the board, consumer, commercial loans, commercial real estate, you know, you're looking at singledigit growth rates. Deposits are growing faster than assets generally. And the difference is going into trading assets. That was the big eye opener, I think, for a lot of people. Uh, in fact, I was emailing with Mark Xandy today, sharing some of that data with him, is that the deposit side grew enormously, almost 5%. And that's quite unusual in a single quarter. And what it tells you is that there's a lot going on in the trading side of the house. So, it's Wall Street versus Main Street, Julia. >> Okay. So, that's the unusual bit is the trading side of the house. >> Not that unusual. It It's getting to be more and more usual to be honest with you. H. So do you think we should expect that going forward? >> The balance of this year, I think the larger banks, your top 10 are going to be able to make hay one way or another. Um, they do have a lot of credit out there. We credit my friend Mara Rodriguez Fadares who was talking about how much private credit exposure the banks have and the loss rates which are quite eye opening. There were almost double digits last year. And when you see a portfolio of credit that has a double-digit loss rate, that means it's like, you know, a single B uh triple D kind of rating, uh that gives you a sense for the quality of these loans. They're pretty poor. So, you know, the lending of banks to non-bank institutions, private equity funds, etc., is definitely subprime and much of it is on a nonreourse basis, which means the bank can't go after them when they default. uh you know last week we talked about the fact that city and black rockck had done a deal so that they could make loans in Europe to the same you know cast of characters and I think ultimately this is going to hurt the banks the banks are going to take losses when we do inevitably see a correction in the world of AI you know as we wrote this week Julia is Micron Technology a company I love by the way I've been following them for a long time worth a trillion dollars or maybe the dollar is not worth what we thought it was I don't So >> maybe we're just going to get used to that like trillion dollar market caps or something. Um >> well it's inflation. That's what it is. >> I remember when it was like a headline um was it Apple that hit and everyone was like wait this was like years ago we were waiting for it to hit a trillion. >> I know. >> Um >> not so exciting anymore. >> Wow. Um there's an Yeah, as you point out some evidence of inflation. Um, you also wrote in the rap uh that Fitch Ratings reports that US private credit default rate hit a record of 6% in April. >> Yes. Which is right. Is this right? 10 times the default rate for US banks. Okay. Um >> yeah, the bank default rates are very low um pretty much across the board uh both on the consumer side and the commercial side. You know, when you have as much asset price inflation as we've seen in the past decade and more, Julia, it gets rid of a lot of sins. And so, until you see those asset prices fall, credit looks like it has no cost. And the banks are responding accordingly, the private equity guys, too. But I was talking with a very interesting guy uh today uh in in the Far East about this and he said, "Chris, when you see the non-banks taking the lead in lending, you know, that's kind of the end of the cycle." And I I think that's right. So the banks are letting the non-banks lend their money and eventually they're not going to do that anymore. >> Okay. And that also just ties back to when you were talking earlier like a lot of this has been subprime as well. >> Oh yeah. So, and you think it's still going to hurt the bank? Like, who do you think is most exposed? >> Well, in terms of sheer amounts, I mean, the biggest is JP Morgan, but City, Wells, PNC, they're all in there. Goldman has got a significant stake. Goldman has gone out of their way to point out that their default rates are low, but you know, as we like to remind our readers, um, in fact, we're doing our bank book for Monday this week, looking at the first quarter data. uh Goldman's got a 10% yield on their loan book. When you charge people 10%, that's not necessarily a good advertisement. You know, the the comparable number from JP Morgan is like 6 and a half. So, you know, you have to scale the price of your loans to the credit quality of your borrowers. That's how you basically have to do it because you know that some of them are going to default and the ones that don't default are going to subsidize the ones that do. So, if you're a Goldman Sachs and you lend to a lot of interesting companies that may or may not be rated publicly and have public equity and other sources of liquidity, you're going to have a higher default rate than a Jamie Diamond because he tends to pick the better credits because he can he doesn't have to pick the credits on the bottom half. Uh, and you see that with Morgan across the board in all the markets where they operate, they really don't touch the bottom half of the market. They don't care and and they don't have to care. What about the um kind of reversal in the low rate environment? How does that impact things here? >> Well, for banks that still have a lot of legacy low coupon paper like the Bank Americas and the Schwabs, um you're going to see unrealized losses rise because they can't sell these securities without taking a loss. you know, if you're still sitting on a GIME 2% coupon that was issued during COVID, that security is trading in the low7s, uh, and it tends to lock up parts of the balance sheet, makes it illquid. Nobody on the street wants to own that security because they're paying more for money than they're getting on the coupon on the bond. So, it it it's kind of a bit of an orphan. Um, I think also over time you're if we see rates stay where they are, Julia, customers are going to have to get high uh used to higher rates. So whether you're buying a home or you're a business borrower, you're going to see a 4 12% 10-year bond yield reflected in the price of your credit. Now, I still think that Kevin Worsh is going to try and shrink the Fed's balance sheet despite what's going on on the long-term end of the yield curve. uh and he may be able to get some leeway in terms of lowering the target for Fed funds because let's be fair, what have we proven in the past quarter with Jerome Powell and Janet Yellen and Ben Bernanki? The Fed doesn't control the long end of the yield curve. They never have. And it's only progressive nonsense on the part of certain Fed governors that allowed them to even try. We listed all of the QE in the blog today uh just to let people see how absurd some of the things the Fed has tried to do really were. Uh and when you look at it, it's mostly been Bernanki, by the way. QE1 through QE3 was his. But Yelen was there. She was encouraging the Fed to buy longdated securities, thinking that they could force down long-term interest rates, and it doesn't work that way. The bond market dictates long interest rates. So I think you know Wars I think will be a breath of fresh air. He's got a tough uh situation ahead of him. We'll see if we get a settlement in this war. That's the big thing. If they can actually settle this war in the Persian Gulf and reopen the straight of Hormoose then that changes a lot. But we're still going to see much higher inflation this year. Julia, I haven't changed that prognosis. >> Double digits still. Yeah, I think so because we're going to see shortages in some really important commodities, things like fertilizer for the farm for example, and that cost is going to get passed through consumers. Consumers are already screaming. Uh consumers are consuming savings right now at a frightening rate. And I think that's in part because they're trying to maintain their standard of living. Uh even though the prices at the grocery store are up 10 or 15% depending on what you look at. So, I I think Americans were under a lot of pressure this year, and you're going to see that in the midterm elections. We we kind of talked about that a little bit in the blog. >> When the price of gold and silver was rising faster and faster by the day, people kept asking if they've missed the boat. They thought that gold and silver were too expensive. Well, if you were looking for lower prices, here they are, and they might not last very long. That's why I'm still a buyer of Precious Metals and why I encourage you to get your free information kit from our partners over at Goldco. They're the number one gold and silver company in the country. They have over 8,000 five-star reviews. Plus, they have the best gold and silver offer in the business, hands down. And right now, they are offering a 10% bonus in gold or silver on qualified orders. Go to goldco.com/thetherrap to learn more. Or you can call 855-573817. Go to goldco.com/therap or call 855-573817 to learn more. You mentioned the history of QE and um over the years uh one through four. When you look at when you look back at those policies, what do you think has been maybe one of the worst impacts of QE? >> I think the most striking impact is on housing. the the actions of the Fed to buy those mortgage back securities forced interest rates down for one to four family homes. So, you already had a bit of a bias and I can understand why they did this. You know, you wind the clock back to 2010 when I was working uh for a big mortgage serer out in California and home prices were flat on it on their back. Uh you had no bid for foreclosed properties and people were trying to figure out what to do. Finny and Freddy had run for cover. So all you really had was Wells Fargo and Gene May supporting the residential market. So by encouraging housing, and that's what the Fed did very explicitly, Matt, it's way outside of their mandate. Um they subsidized interest rates. They forced them down. And by 2012, 2013, you started to see the market for foreclosures clear out and home prices started going up and they never stopped. And then when you had COVID, that was like, you know, running out in the backyard for the trash fire, right? And throwing a uh a bucket of gasoline on it because, you know, home prices accelerated over a period of years double digits, you know, so that by the time we get to the end of 2025, home prices in many markets, Julia, were up more than 50%. That's crazy. But that's that's the policy actions the Fed took. I think housing is really the headline of that period. Did it impact other sectors? Absolutely. Commercial property, uh, the general tenor of balance sheets, right? Because when when rates are really low, asset prices go up. That's the math. We included the formula for cap rates at the end of the blog just to illustrate this for people. >> Yeah. The housing one, it's like that's the one we all see. >> It has huge political consequence. That's the thing. For the Fed to do this without explicit instructions for Congress, I think illustrates the problem that Kevin Worsh really wants to address, which is that this is an agency that has a largely progressive coloration. Uh that's out of control. They think they can do anything they want because they don't believe the Congress is going to reign them in. Uh but who knows? I think that may actually come. Congress needs to pay more attention to the Fed. They should have a committee that just does that. But you know, members of Congress have a variety of agendas. So, >> well, they should watch the rap every Saturday and listen and learn from you, Chris. Um, >> yeah, we'll see. >> Let me ask you this because in the rap, you had a line that got my attention. You said we may be closer to QE5 than be than Bessant knows. >> Yeah. He had made a point of saying he didn't think the Fed was going to restart large purchases of securities, but you know, when I heard him say that, I just kind of grimaced and and thought, "Oh, yeah, you may regret saying that." Um, I think the Fed is inevitably going to have to pick up the pace of purchases of Treasury securities. They're going to let their mortgage book run off. And I still think there's a good chance that Kevin Worsh is going to swap the mortgage securities that he owns with the Treasury to get Treasury securities because he wants to clean up their balance sheet and kind of put the the progressive experimentation of Janet Yellen uh behind them. U but you know in Washington it's still fantasy land. Everybody wants to pretend that we don't have these big budget deficits. But it's clear when you look at the numbers that the Fed has to grow their balance sheet because the federal debt is growing. There's a direct relationship between the amount of debt, the Treasury's cash account, what we t uh call the Treasury general account or TGA, and in bank balance sheets. Those are the three big factors that go into the calculation of reserves. And if the debt is going to keep growing as fast as it's been growing, then the Fed has to grow, too. There's no way to get around it. The Fed's balance sheet often comes up. It makes me wonder like um >> a cocktail party channel. >> Would they be um I was like would they be fired for their performance? >> Well, they should be. I mean, they you know, I think we should have to hold governors a little more accountable for their decisions. I know they want to have a certain degree of secrecy and privacy for monetary policy decisions, but you know, deciding to run a hedge fund and thinking that you can dust off the work of James Tobin and engage in yield curve control is absurd. We've just seen the Bank of Japan try to do that for over a decade and they have failed miserably. So why did the Fed think that they could do that? Because the result was losing hundreds of billions of dollars for the Treasury. And I I do think that's something that Powell and the other members of the FOMC should be held accountable for. >> Um okay. Well, new leadership at the Federal Reserve under Worsh. >> Yeah. >> Any expectations around um what might happen with the Fed funds rate? Is there potential for a cut or a hike? >> I I think if you held a vote right now, you'd probably have a majority to raise the Fed funds rate. Um, but as I said earlier, you know, we talked about this last week. The Fed doesn't control the war in the Persian Gulf. They don't control oil prices. They don't control anything like that. So, if you think that throttling uh economic growth by raising the Fed funds rate what, a point, two points, you know, you have to raise it a lot to get a a reaction is going to somehow force inflation down. That's a rather Byzantine, you know, medieval perspective that I didn't think we still had in this country. You know, in the 70s we did stuff like that. They stomped on the brakes and raised interest rates and the economy went into a recession. I don't think politically we could do that now, Julia. Um I I think the politics of that would be horrendous. So, I'm hoping that wiser councils are going to prevail and Wars and the other governors are going to realize that the war is beyond their control. There's not much they can do about it. Shrink the balance sheet. That's tightening by the way. That that would be a good start rather than changing the Fed funds target. And then maybe, you know, fall, even the end of the year, if we get a deal and we start to see, uh, you know, results in terms of repairing the damage to productive capacity in the Gulf, which is what we're really talking about here, right? Um, then you can make an assessment. But just to raise interest rates now in reaction to the higher inflation numbers, I think is silly because they're going to have to reverse themselves. How long do you think they could do that? a year, you'd have Congress calling for their heads. >> Yeah. Is your base case still stagflation? >> Yeah. Less growth. If we see long-term interest rates remain elevated, what's going to happen is spreads are going to widen. Right now, if you look at spreads for corporate debt, they're as tight as they've been in five years. There's so much demand out there for paper. Julia, I I can't tell you how many calls we get from private equity funds who are looking to participate in different markets, even residential housing, and they don't want to, you know, rent houses and buy them up. They basically want to do fix and flips. They they have short-term strategies, but the amount of money is mind-boggling. So, that's why spreads are so tight. There's a lot of demand for paper. However, that could change. And as that does change, I think you're going to see funding costs for private companies go up and that's what slows down growth. When when spreads are tight and companies can go out and raise money in the bond market, you get economic growth. That's why our economy has done so much better than economies around the world. We have a bond market that works. Uh but you know when you look at spreads it tells you how much inflation is in the system and how much demand there is out there right now for paper. It's striking. You know when you look at banks think about the fact that most of the big guys 20% of their book rolls off every year. So not only do they have to make new loans but they got to replace the stuff that they're losing. You know somebody like city or JP Morgan they have an average life on their book inside of five years and they manage it that way. It's it's less risky. But that means they have to go out and make new loans. And so the competition for big assets that move the needle at a JP Morgan, a $2 trillion bank, uh, is intense because you have private equity funds, insurance companies, countries, you know, corporates with too much money. You can Berkshire Hathaway with trillions of dollars sitting in the bank. They all need earning assets. And so it's interesting to me that the inflation in the system is very evident in those those asset prices. You know, that's why commercial real estate's been coming back to some extent. >> It's still a bit harsh. So yeah, it depends where you are. >> It's a case by case kind of thing. the private equity thing you mentioned like the fix and flips as an um example like they're just looking for any sort of opportunity to put this I guess a lot of excess cash to work >> looking for any sort of yield. >> I'll give you an example. Um right now you know you had that legislation that was proposed on Capitol Hill that would have prohibited institutional investors from buying residential homes >> for rent. Um, but the government is sitting on 15,000 houses that they need to dispose of. These are houses that have come largely from reverse mortgages where the borrowers died and the note is sitting there. But for political reasons, they stopped the auctions. So, everybody's waiting for these auctions to restart. And those houses will be sold into the market. These investors do not want to rent these houses. That's a false narrative that we saw the Democrats propagate on Capitol Hill. And a lot of Republicans went along with it. They thought, "Oh my god, you know, the politics of this are awful." And they're right. But the truth of the matter is the investors who put money into these strategies basically want to buy the house. They have uh a serer working for them. They fix it up. They make sure it's in decent condition to sale, which they have to do. Uh make sure there's no probate or anything else because remember these are reverses. you had retirees living in these houses. Uh make sure the family doesn't want the house, which sometimes uh is the case. And also sometimes there's money on the table that should go to the family or to the estate. Uh and so you have an opportunity here to hit a home run for the Bush uh for the Trump administration. But you know, the politics of housing and affordability have just been daunting uh going back to last year. >> Yeah, the politics of it for sure. Um, it's interesting you Well, I bought a home and people know that I'm trying. Thank you, Chris. But I'm trying to, you know, uh, fix it up and book vendors for various things. >> Oh, yeah. >> And >> I've kind of noticed there's some private equityowned various types of services, and I'm specifically screening out to avoid the private equity owned and look for the momand pop businesses to work with. >> Yeah, I would agree with that. uh private equity has too much money to invest. So they have been rolling up every kind of service provider you can think of. Plumbers, electricians, >> dentists, oncologists. I mean it it's incredible. And they screw these businesses up terribly. Uh and then eventually they'll sell them. So that's what private equity is for. Julia. >> Yeah. I wanted to make sure my dentist wasn't private equity and tell me I had a bunch of cavities or something and like come in and get your cavities fixed. >> That's right. Don't be following you around. >> Now, you can usually tell like my eye doctor in New York got bought by a private equity shop and it was a good trade for him. He didn't have to sell the business. Um, but my god, they went crazy. They started sending me all these, you know, emails and saying, "Oh, you got to make an appointment. I already had an appointment." So, when you have a private equity shop take over a business like that, if they start behaving crazy, that's a pretty good indication of what's going on. Yeah, definitely. Um, Chris, we have a couple of viewer questions for you if uh you want to get into it. All right, this one comes from Robert. >> What does Chris think about holding shortterm TIPS through 2026 as part of the non-equity portion of an investor's portfolio? If not, what are the other alternatives? >> I I don't think TIPS are really reflecting the true rate of inflation. If you look at TIPS right now, they're telling you inflation's going to be 2 3% next year. Uh I think you're much better off uh getting into a fixed income investment. You know, I own Anley. There's a number of other REITs that own government insured mortgages. Uh there are even some interesting corporates out there that would pay you several times what you're going to make on the tips. I don't think the tips are a good shelter for inflation right now. Timothy uh writes, "Many of the major US cities and states are becoming pinched with revenues declining due to relocation and tax bases shrinking. Do you see increased risk of municipal bond default or restructuring resulting in borrowing costs going higher for those types of investments? Recall Orange County and New York City." >> Yeah. And New York City today. Um I I guess it's a case byase uh analysis you have to do. If you live in a certain jurisdiction, you have tax advantages for owning their debt. On the other hand, you got to realize that municipal debt, both state and local issuers, is not a very well disciplined market. They tend to take their disclosure obligations with a a certain degree of casualness. And I I would just be very careful about which names I own. You can even have names in the same state that are better or worse. You know, Illinois, for example, uh New York is another one. I would look at each issuer and make your own decision about the credit quality. Um you know, it's it's a generic problem that question addresses because yes, there are many states that have been shortfunding their pensions, for example, in order to maintain uh spending. New York is a classic case in point and eventually they're going to get caught. Illinois's already got a terrible problem with this. So, I do think that there are states that have been losing population and particularly losing older uh residents who have a lot of income and a lot of assets and you're already seeing, you know, the billionaire taxes and everything else being proposed around the country. But that's not going to fix it. Eventually, these blue states have to become more competitive, and that means they've got to shed some of the progressive uh language and and try and be a little bit more evenhanded in the way they deal with business. >> This one comes from Kefir. I'd love to hear Chris dig a little deeper into why higher inflation won't drive down the cost of gold. Also, what are his views on the strength of the dollar with current oil prices for for longer or even a slightly decreased oil price into the second half of the year? >> I think we mentioned it. Yeah, energy prices have been bouncing around depending on what news we've had out of the Persian Gulf. If you think of it, when we have higher rates on government bonds, for example, that competes with gold. when you when you have the ability to invest in something that you know is going to be paid back at least in kind. So you know a treasury bill or a bond or what have you. If the rates higher then it does compete with metals. The only thing I would say is that my basic thesis on precious metals both gold and silver is based on two factors. Number one scarcity and number two central banks are buying it to uh use for reserves. uh silver then has the additional factor of commercial demand for technology. There's nothing you need to make in the world of AI that doesn't involve silver in one way or another. Or as one publication I love to read, Silver Academy put it, think of the silver that's been vaporized this year in the Gulf War and it's not coming back. You're not getting that metal back. It's at the bottom of the ocean or you know in some valley in Iran. So all of the weapon systems, the technology, everything else that drives the modern state requires certain inputs and one of the biggest is silver. So I, you know, I think you always have to compare the fiat world with the precious metal world. The precious metal world is about maintaining real value. But if you have high yields, we wrote about this in the blog, that piece we did on the virtuous barbell, then you should take advantage of that, too. It's a matter of balance cuz you need fiat to pay for your groceries, right? You need fiat to pay your rent or your mortgage or what have you. And what you want to do is look opportunistically for income in the world of bonds. And also, if you see an opportunity in stocks, you take it. I mean, look at the craziness in AI. Who would have thought that some of these stocks would perform the way they have? >> Yeah. Who would have thought? Um, >> well, it's it's a momentum market. It's really hard to predict. Sometimes we see these opportunities and we write about them. Other times we don't. I think the AI opportunity, the build spend that's driving a lot of these stocks. Now, it's not about profitability. It's simply the fact that people believe that everybody is going to spend a lot of money with Micron, a lot of money with AMD and other producers. Uh, and they're correct. Will will AI be a profitable endeavor down the road? It's hard to say. I think mostly it's going to be a giveaway, but that's just me. >> I have one more question for you. >> Um, this goes back to the Fed and now that we'll have Wars at the next FOMC later in June, coming up in June. Um, we're almost in June, everybody. >> So, we know that President Trump has been pounding the table for a while now and criticizing Jerome Pow because he wanted lower rates. >> Yeah. But it seems like the prospects for lower rates are just disappearing at this point. How do you think that one's going to how do you think that one's going to play out if we don't get cuts? >> I doubt the committee is going to take action as a new chairman is being seated. So I wouldn't expect them to do anything in June. Although I do believe they will remove the language from the statement that alludes to a cut in the future. A lot of the governors wanted that removed in the past meeting. So, I think that's a given. Um, I wouldn't be surprised to see a majority of the committee in favor of a rate hike in July. And the question is, are they going to take our advice, which is wait and see, or are they going to try and symbolically address inflation by raising the suggested target for the Fed funds rate? You know, one of the things we wrote about in the blog this week is the fact that policy has got less and less efficacy. It has less and less impact on the markets. So, I hope the Fed is not going to try and address the inflation that's coming from energy and other sectors due to this war because they're going to fail. You know, whenever you take policy actions, you want to have a reasonable belief that you're going to get the result that you're looking for. And I don't think raising the Fed funds rate is going to do it. If you want to make a big statement, you change the reserve calculation and you say to people, well, we're not going to buy any more Treasury bonds for a while. We're going to let the portfolio run back down to where it was back in 2010 when Uncle Ben Bernani, you know, revved up the printing press, right? That's a tightening. And I think that symbolically would be at least something that Wars can throw on the table in his conversation with the other governors. The markets may or may not understand this because most economists frankly never think about the balance sheet even though it's the most important part of monetary policy today. So, you know, that's how I see it. I I think there will be a a clamor on the committee from some of the more conventional thinkers for an increase in interest rates. But you got to remember these economists are not geniuses. They're they're just normal people and they're trying to do their jobs and they've been taught that changing the Fed funds rate is how you address inflation. I don't think that works the same way it used to work 10 years, 15 years ago. And that's why we need to be I think careful what we do because you don't want to lose credibility. If the Fed acts and inflation keeps going up because of these external factors we've discussed, I don't know what they've accomplished other than reducing their own credibility. >> Yeah, maybe we just need a different a different playbook here, Chris. Um, >> well, you know, I can always commute to Washington. What can I say? >> Oh, I'm saying, you know, you'd make a great Fed chair one day. >> I'll see if I can buy my mom's old house in Georgetown. You know, we got the Westies. We had two Westies when we lived in Georgetown. That was great. Very popular. >> I love that you love Westies. I'm a Westy household. Well, my dogs part Westy, but they're they're just sweethearts. Yeah, we love them. Chris, um, not only do we love Westies, but we love doing this with you every single week. It's so much fun. Uh, what are you thinking about next week? What are you going to be following? >> Well, we're publishing our bank report Monday. I'm going to have fun this weekend playing with numbers. It's actually some of the most fun stuff I do. Um, the war is still top of the heap. Uh, the equity markets, when are we going to see a correction? This AI thing is getting really silly. This is what you call a crowded trade on Wall Street. A really crowded trade. Uh, the other sectors are not moving that much. Uh, banks, for example, are not moving that much. We're going to look at that in some detail on Monday. So, you know, we have a very lopsided market right now, and that does worry me. I'm really watching the 10-year because that's vital for the housing industry. You know, we're kind of a little bit below 4 1/2, but I got to tell you, that move over the past several weeks really clobbered a lot of mortgage lenders, and it totally changed the conversation. We're we're talking about a lot of consolidation now. We could see three, four new M&A deals in housing announced between now and the end of the year. And I mean big deals. Top 10 lenders merging. >> So um >> wow, there's a prediction. >> Well, they don't have any choice. You know, if you don't have the volumes, you got to reduce expenses. And a lot of people, we talked about this when we were talking about United Wholesale Mortgage. They were keeping capacity ready because they thought we'd get a couple rate cuts and yee-ha, right? We'd go out and make a lot of loans. That's not happening. So, we have just the opposite scenario. and the managers of these companies have to make a decision. Uh it's a difficult decision. We've been working a lot in the distress market with a couple of our partners. So we have a be you know bird's eye view of what's going on here. Delinquency is rising uh and people are desperate to generate revenue. They really are. >> Well Chris, um great seeing you as always. Uh folks, uh you can head over to uh goldco.com/thetherrap or you can give them a call at 855-573817. We appreciate them being partners of the show and Chris, great to see you. I hope you have a wonderful weekend. Looking forward to our conversation next week. And everybody, uh thanks again for your support of the show. And that's a wrap. See you all next