R. Christopher Whalen is a Wall Street Renaissance man. He is chairman of Whalen Global Advisors LLC, an investment banker and author who has built his career integrating and explaining the forces that drive banking, mortgage, finance and fintech - both on the technical industry side and on the political Washington D.C. side as well.
Chris also edits the weekly Instititional Risk Analyst and contributes to other publications and forurm — while still finding time to testify before Congress, the SEC and the FDIC. where his fans eagerly await his commentary and razor sharp analysis of banks’ and their quarterly earnings.
One of his passions is clear writing about the history of business, finance, the economy, and the people who have driven it over the past century, including those who continue to do so. In fact as the consumer price index report showed that inflation numbers in May came in a little better than expected, he joined me to talk about the second edition of one of the literary loves of his life: “Inflated: Money, Debt, and the American Dream.”
So dive in and hear why the latest inflation numbers do not convince Chris that Fed Chair Jay Powell will be able to bow to President Trump’s call for more rate cuts right now, and why it appears to be more likely that rate hikes will be next. As the failure of the Congress and Treasury so far to take the steps needed to bring down the U.S. fiscal deficit sends shudders through the U.S. bond market, get his view on this and what it means for the Fed’s longer-term policy path too.
Fed making policy from its back-foot 00:02:09.789
Everyone believes that it's going to slowly force a majority on the FOMC to cut rates. But let's be fair Kathleen. These statistical measures of inflation don't really get to the nub of the issue in the United States today, which is home prices. The Fed was unwilling, and frankly, I think, afraid to tighten sufficiently to force home prices down. I'm thinking of Paul Volcker, obviously. But this time around they just couldn't do that because they are so concerned about the Treasury market, they are so concerned about the amount of debt that's out there that they, I think, had to stop. Remember, mortgages got to, I think, 8% for a whole week. That was the sum total of tightening by the Fed, and they are going to probably stop shrinking the balance sheet this month if we can take Lori Logan at her word. She was the one who set up the repo program, and a lot of other things that we now regret. And you know we're getting ready to expand. That's where we are in the cycle. So the Fed has missed their opportunity, I think, to cut rates they should have cut last year one or 2, and that would have been it. And Donald Trump wouldn't be able to yell at them anymore.
Swimming in liquidity 00:03:59.140
There is so much liquidity in this economy, Kathleen, that we haven't even begun to slow things down. I think, in fact, you could probably make a better case for either leaving rates, as they are or raising rates. because, again, I see no evidence that you have any kind of serious contraction. If you look at the employment data, if you look at other indicators, the only reason that the party isn't going more intensely on Wall Street is that the relative change between 2020 and today was so large and it literally left so many assets, so many sectors beached. Private equity, for example, is a complete train wreck, largely because of interest rates. All of those portfolio companies that were invested in privately can't be sold either publicly or privately.
The Fed’s job focus 00:05:32.920
The <Fed> has been looking past, sometimes looking past, inflation because they're so concerned about employment, right? They're so concerned about the job market. That's the dual mandate. A lot of people have criticized them for <that>.
Inflation progress? Or just other reasons to cut rates? 00:06:10.380
There are some indications that home prices are falling, especially higher end homes. You're seeing a lot of compression down South where those buildings on spec. both for rentals and homes for sale. And so you see softness. But it's still not the kind of consumer-led traditional 1970s sort of recession that everybody has hard coded in their brains. We keep looking for this partly okay, because of the mandate. Obviously, that's the legal mandate. But when you look at the rest of the economy, there's plenty of reasons to cut rates. Look at commercial real estate. It's a total train wreck. Look at multifamily. Real estate in the northeast, which I call the new subprime. We have significant problems there, but that doesn't fit into the mandate. So you're right. The fed has been looking for any kind of support, whether it's services or other areas that show slowing so they can point to that and say, you see, the economy is slowing. We have to do something now. Employment hasn't been helping them, as you know it's just been chugging along, and I think it's partly because Americans work hard. When times get tough, when inflation causes families to have less disposable income, less flexibility. They go out and get another job. They work hard!
Inflation expectations are in gear- but it’s complicated 00:08:22.000
I think you can find evidence either way, depending on where you want to look. You certainly have people anticipating higher prices. If you talk to most of our colleagues, Kathleen, and say to them, How much have your personal inflation prices gone up in the past year? You're going to get an answer in high single digits, at least health care, food, whatever it is. Right. On the other hand, you see signs of deflation all around us. There's so you have a mixed bag here, and when you ask people, do you expect home prices to go up? The answer is, yes. that's why you still see inventory moving off the shelf in weeks. Barely in states like New York, New York has one of the worst markets for residential real estate in the country because of the politics. But homes are still selling here because there's no supply number one. But people think that house is going to be more expensive next year. Replacement cost everything about housing is still pointing upwards in terms of inflation expectations. So it really depends where you look, cars. Basic item, that people need to live right? Are car prices going up? Yeah, they are depending on where you are in the country. So it's kind of interesting in that. We don't have a consistent view from consumers, and it really depends on how you ask them the question. That's always the case with polling right? How you ask the question. If you ask them about housing, they're going to tell you. Costs are going to go up next year.
Institutions with unrealized losses & other problems- 00:10:34.170
Well, we certainly don't want to see long-term rates go up. If you got up to 5% on the ten-year treasury you would hear screaming in Washington because of the banks. Now many banks have whittled away at the problem. From 2020. They've sold securities. They've restructured their balance sheets. But look at the fact that Bank of America by themselves is 20% of the unrealized loss in the industry. More than half of their tangible capital is impaired because of mark to market losses. They kept everything from Covid. all of those one and 2% mortgages. Brian kept them so. There was a huge duration problem in the industry as a result. And I think that you know, the funny part is that banks grew a lot as a result of Fed policy. Quantitative easing made banks grow. But it wasn't healthy growth. It's not like they're making more money. They're making less money per dollar of assets today than they were in 2008, considerably less. And the other thing you hear, and you hear this from Jamie Diamond quite a lot. When he's out speaking. They don't have enough demand. They end up buying securities instead of making loans. So you know, when you look at this economy, Kathleen, it's not an inflationary economy from a consumer perspective. It's not like they're out borrowing and spending, and you have that kind of demand, pull, inflation where you have it is on the commercial side who are the single biggest borrowers of banks today, non-bank financial institutions. primary dealers, hedge funds. That line item's growing 20% 30% year over year. And that's the only light item of banks that's growing like that. Everybody else is down in single digits. So when you look at this economy. You see a lot of financialization, a lot of activity in the markets, or an attempt of activity, and not so much on the consumer side, although I will tell you that delinquency on the housing side in the bottom quartile of incomes is rising very rapidly. We could see delinquency rates at the FHA close to 20% next year.
Landlords: from pariahs to broke 00:13:10.170
People we don't care about too much… landlords, right? Landlords didn't get paid for 2 years. That's why many of these companies are slipping into bankruptcy. Now we have more fully let buildings in New York City that are slipping into special servicing than we have ever seen. Now think about this. This is a new building that's fully let. Why isn't this building making money? And the answer is that it's too much debt.
Trump I- Trump was right…and almost dead right 00:14:54.130
Well remember what happened. At the end of ‘18. The Fed had taken their eye off the ball when it came to market conditions. They had been raising rates. But that wasn't the problem, Kathleen. The problem was is that they were shrinking the balance sheet at the same time, and they didn't understand how much liquidity the system needed to function specifically the money markets. So November, December of 2018, we were in total gridlock. Small dealers couldn't get access to cash. Jamie Dimon and Wells. Fargo, too, had folded their arms, said, We're fine, we don't need any more exposure through the end of the year. So it was a disaster the S&P tanked. We had a big market event. That's why Powell pivoted. It wasn't because of what Donald Trump was saying, and I think President Trump was right, he was saying the obvious. but the fed then immediately goes into an ease pattern. Remember, Yellen and Bernanke had to do that press conference with Powell to show support for their colleague, and they started selling forward mortgage contracts to push interest rates down. Remember, this is early 2019, a year before. Covid. This is what I call the Powell panic - and we talk about this a good bit in the book, simply because it was extraordinary. You know, the Fed literally abandoned existing policy and went the other way. That's how intimidated, and I think fearful they were after December 2018. So by the time we get to Covid we've already pushed interest rates down considerably, and then they had to double down again.
Treasury market hits the wall 00:16:27.610
In March of 20 the Treasury market stopped functioning, and the Fed literally came in and bought the whole thing. Now the narrative said, Oh, well, we're helping the economy. We're helping people deal with Covid and the lockdown and everything else. But the reality was, the Treasury market didn't work for about a month. And that's really what caused the Fed to push rates down to Zero. So you want to clock forward to today, we're kind of almost in a similar situation, in a sense that rates are very high. Balance sheet has been shrinking. The room is dark. We don't know where the floor is. We're feeling around down there to try and find where the minimum level of reserves is. But nobody really knows.
Interest on reserves?? No Mas? 00:17:07.690
I think some members of Congress are talking about taking away the Fed's ability to pay interest on reserves, which means we'll go back to a hard reserve system in this country. So we have a lot of moving parts on the table. But what I did with the book was, I tried to explain the last 15 years in that 9th chapter that I added just give people some way of understanding; I also spent a lot of time paying attention to some of the great researchers during that period, particularly Lev Manand and Josh Younger from the Fed of New York. They did a brilliant paper on the legal basis of the Treasury market. Did this just happen after World War II. No, the Fed created it.
The Fed’s big problem; 3-decades in the making 00:19:08.870
The big problem with the fed in terms of policy. Kathleen really goes back almost 30 years. When this was during Greenspan's tenure, when they started targeting fed funds, and that one number became the iconic representation of monetary policy in Washington. It was a simple enough concept that members of Congress could understand it, you know. Let's be fair. They are not tuned up for finance or economics, and it was also easier for the Board to communicate. But I think it put them in a box, because ultimately, when you only have one metric that is supposed to somehow represent something as complicated as monetary policy, which changes overnight and which has variables that are part of that picture that change overnight the relationship between them… Bill Nelson writes about this brilliantly at Bank Policy Institute, where he describes how reserve factors can change in very short periods of time. So the decision you want to make a month ago no longer makes sense. It is an extremely complex equation. I think the fed would be better off if they targeted inflation and took policy steps. No, they're not. They're targeting fed funds.
What they ought to do <to have done> 00:20:27.850
You see, they should say we are taking steps to get inflation back within our target range, and then we wouldn't have the market sitting here speculating on whether or not they're going to change the target for fed funds, which, in my view, is secondary. The balance sheet is what matters. But most economists are so fixated they've been trained this way on the Fed Funds targeting process, on the economic and intellectual process that gets them there. And the model that the Board uses for this. All of this, I think, unfortunately, is a source of a lot of problems, because these models are not static. They change over time. And so does the data.
The way we were…and could be 00:22:35.690
But if we went back to an implicit target which said, we're targeting at least 2% inflation. And we are going to make a variety of policy moves and decisions that are going to get us there. It would take the heat off the fed number one, and it would force the markets to be a little more forgiving and a little more tolerant in terms of whether or not we're actually there. Because today, if you look at the headlines around any of the data that comes out of Washington regarding inflation or employment, or all the rest of it. Everybody has broken this down to the point where they can just speculate and game on whether or not the number is going to change. I don't think that's very healthy for the markets, so to me the problem was is when the Board fixated on using the Fed Funds rate as a representation of policy.
Monetary policy is not like pulling levers and pushing buttons 00:23:25.650
They nationalized the private market. For one thing they never asked Congress about that. We just took it over. Then we had the Libor mess fed could have easily fixed that. Instead, they get rid of Libor, and they come up with their own rate, measure. We use it because we have no choice. But frankly, we could price off of fed funds. We could price off of the forward market for mortgages instead. And who knows? We'll see what happens. But my point is a lot of these monetary policy decisions over the last 20 - 30 years reflected a bit of hubris in a sense that we thought that all we had to do was pull the red lever or push the blue button, and we're going to get the outcome that we want. It's part and parcel of the delusional narrative that we have regarding the fiscal situation and budget deficits, we still are convincing ourselves that it's not a problem.
Fiscal policy <conditions> is the quite driver of a lot of this 00:24:19.550
It reminds me of Argentina in the seventies, you know. So we have a lot of strange ebbs and flows in the narrative around monetary policy in this country, in part because the politicians don't want to get bad news. You saw Secretary Besson, up on Capitol Hill today. They're not asking him hard questions. He gets up, and, you know, puts his hand over his chest and swears that we will never default. Well, that's nice. But you know what I mean. There's a certain surreal quality of this. And why does the fed say 2% inflation, because they understand that a system with this much public sector debt has to at least have 2% inflation.
What the BIG ONE will look like 00:25:25.470
Let me walk you through what happens. Treasury Market has a bad day. Let's say the 20 year treasury which we shouldn't even be trying to sell. People hate that maturity.Yeah, that's it. We do. We do twenties and thirties one day, and the market doesn't like it. The market doesn't show up. We have insufficient bids for the auction. The fed has to come in and buy it. When the fed buys securities in the open market. They expand the banking system, deposits automatically grow because treasury is in deficit. The fed is buying bonds as those bonds roll off the Fed's book.Right as we are today, we're contracting the balance sheet. The banking system shrinks, but when the fed is out, doing quantitative easing as they were in 2021, 22, the banking system was growing dramatically. That leads to inflation. So your hyperinflation comes because the Fed has to support the Treasury market. They have to make sure the Treasury can issue debt, and when they do that they're going to force the banks to be sellers, they credit the bank's account at the fed right reserves expand. There's your hyperinflation.
Fed’s actions are political 00:28:03.600
Ultimately the Fed's actions when they're intervening in the open market are political very much, and when you had the Biden Administration in the White House, of course, they did too much. Now you talked earlier about Janet Yellen. I've been critical of Janet Yellen, but you know what. In 2018 19, she was trying to normalize the balance sheet before she went over to Treasury. They went too fast, and we had a problem. But the point is is that the relationship between the fed and the Treasury is fundamental. You cannot separate them. And that's where the inflation comes. That's why it's so important to get spending under control in Washington. If we don't get spending under control. The fed is helpless. There's nothing they can do because they cannot let the Treasury fail. Imagine if they let the Treasury default. That would be the last day of work, for whoever was in the chair…
Treasury Secretary Whalen… 00:29:13.340
You put me at Treasury, I'll take care of this. You freeze spending. You should only allow spending to rise at the Gdp rate or less. and then this economy would naturally grow its way out of a hole. We are a very dynamic economy. It's not like we can't fix this, and we have lots of assets. We have hundreds of trillions of dollars worth of assets in this country. So I'm not worried about 36 trillion dollars in debt. But the problem is is that the interaction between treasury and fed in managing that relatively small amount of debt impacts consumers.That's where the inflation comes from, and they pay the price. You see it in our politics today. Why do you think we got people in the street in Los Angeles protesting, fighting with police is it because they're happy and everything's fine? No, you know the reason Donald Trump got elected last year is because there are a lot of Americans who can't shop at Walmart anymore. They just can't afford it. So think about that. And that's all. Because of the inflation that comes from Federal deficits.
Richard Christopher Whalen is an investment banker and author who lives in New York City. He is Chairman of Whalen Global Advisors LLC and focuses on the banking, mortgage finance and fintech sectors. Christopher is a contributing editor at National Mortgage News. He is a member of FINRA and Senior Advisor at J.V.B. Financial Group in New York.
From 2014 through 2017, Christopher was Senior Managing Director and Head of Research at Kroll Bond Rating Agency, where he was responsible for ratings by the Financial Institutions and Corporate Ratings Groups. He was a principal of Institutional Risk Analytics from 2003 through 2013.
Over the past three decades, Chris worked as an author, financial professional and journalist in Washington, New York and London. He has held positions in the House Republican Conference Committee, the Federal Reserve Bank of New York, Bear, Stearns & Co., Prudential Securities, Tangent Capital, and Carrington Mortgage Holdings.
Christopher holds a B.A. in History from Villanova University. He is the author of three books, including his most recent work “Ford Men: From Inspiration to Enterprise” (2017), a study of Ford Motor Co and the Ford family published by Laissez Faire Books. He is the author of "Inflated: How Money and Debt Built the American Dream" (2010) published by John Wiley & Sons; and co-author of “Financial Stability: Fraud, Confidence & the Wealth of Nations,” also published by John Wiley & Sons.
Christopher has served on the Economic Advisory Committee of FINRA for over a decade. He served as an advisor on Season 5 of the SHOWTIME series “Billions.” Chris is a member of The Lotos Club of New York. He previously served as a fellow at Indiana State University (2008-2014), a member of the Finance Department Advisory Council at Villanova School of Business (2013-2016) and board member of the Global Interdependence Center (2017-2019).
Christopher edits The Institutional Risk Analyst newsletter and contributes to other publications and forums. He has testified before Congress, the Securities and Exchange Commission and Federal Deposit Insurance Corporation. Chris appears regularly in such media outlets as CNBC, Bloomberg, Fox News and Business News Network. Christopher is active in social media under the Twitter handle “rcwhalen”.
Considered one of the most incisive financial analysts on Wall Street, Whalen has also worked in politics, at the Federal Reserve Bank of New York and as an investment banker. In 1993, Whalen was the first journalist to write about the then-secret FOMC minutes and has followed US monetary policy for more than three decades. First published in 2010, Inflated has been considered essential reading for all investors, as its analysis of long-standing monetary policies and the cyclical debt crises that have faced the US is a cornerstone of any financial education.
With the release of the highly anticipated second edition, Whalen revisits the core thesis, how a century of debt has reshaped the American economy, but with a close examination of the seismic shifts and uncertainty in the markets which have ripple effects from Wall Street through everyday investors. The history of inflation is the history of the US and Inflated starts at the beginning, bringing readers through to today with practical advice for investment strategy.
"Inflation and debt is the national pastime of America going back to the earliest days of the Republic. Franklin Roosevelt tried to convince us that we could use paper as money. That worked for a while, but a century later gold and other precious metals are in resurgence as America's debt pile grows. No surprise, in the future the paper dollar inevitably must compete with other fiat currencies for global trade and investment flows." - R. Christopher Whalen.
The publication of Inflated could not be more timely as it also covers topics like tariffs, the housing market, The Federal Reserve's inflation policy, and even an examination of currencies. With contributions from portfolio manager David Kotok and others, readers will be confronted with dilemmas such as: should cryptocurrencies like Bitcoin be considered a hedge and treated like a derivative of gold? What are the long-term effects of inflation on consumer spending and how can Americans develop new models and frameworks for distinguishing between real economic growth and the illusion of growth created by inflation and credit- driven speculation?
"No one knows more about the complex interactions among banking, mortgage finance, interest rates and inflation than Chris Whalen. His book Inflated is must reading for those who wish to avoid the next monetary meltdown." - James Rickards, NY Times Bestselling Author of Currency Wars and MoneyGPT .
Inflated offers startling predictions based on historical analysis and navigates uncertainty by equipping the reader with insider analysis which will protect their assets and investments. What have investors learned from the mistakes of history and how to diversify to avoid repeating those mistakes.
R. Christopher Whalen is also the author of Financial Stability (2014), Ford Men (2017), and Seeing Around Corners (2024). Christopher publishes the newsletter Institutional Risk Analyst and appears in media outlets including CNBC, Yahoo Finance, Bloomberg and The Wall Street Journal. Inflated: Money, Debt, and the American Dream is available through major retailers, independent bookstores. More information is available at rcwhalen.com.
(SOURCE Whalen Global Advisors LLC)
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