#410 Chris Whalen: Age of Uncertainty - Falling Home Prices, Cracks in Private Credit, & Sidelined Fed

Julia La Roche (0:00)

Hey everyone, welcome back to another episode of The Wrap with Chris Whalen, where we break down what's happening on Wall Street, Washington DC and everywhere in between. In this episode, we get Chris' reaction to the Fed's 25 basis point rate hike, which he called pretty lame, especially when you have a $2 trillion deficit. We also got him to weigh in on inflation, an area he's been talking about a lot on this show, especially with rising energy prices and why that's going to continue to be a problem. We also got into private credit and we got his latest on how he wants to be allocated and what he's calling the age of uncertainty for markets and where he sees some problem areas cropping up. I really enjoyed this conversation with Chris. We love doing this for you all every single week. So I hope you all enjoy the latest episode of The Wrap.

Hey everyone, welcome back to another episode of The Wrap with Chris Whalen, where we break down what's happening on Wall Street, Washington DC and everywhere in between. Chris, great to see you.

Chris Whalen (1:19)

Nice to see you, Julia.

Julia La Roche (1:20)

Well, I wish we were together in New York, but it didn't quite line up this time. At some point, we'll have to do another in-person episode, but I'm in studio today.

Chris Whalen (1:29)

Yeah.

Julia La Roche (1:30)

All right, before we get into the episode, I got to give a quick shout out to our partners over at Monetary Metals. You guys can go to monetarymetals.com/thewrap to learn more and we certainly appreciate their support.

All right, Chris, now that we're back in the swing of things, we just had the FOMC, a 25 basis point hike, which you expected when we spoke last week. Oil is still above $100 a barrel. We saw the 10-year hover above five, the new normal, if you will. Let's just start with your big picture reaction to this week and the hike.

Chris Whalen (2:06)

Well, first off, the Fed had to do something where they would have been completely irrelevant.

There's not much the Fed can do about the inflation we're facing, however. We're actually doing an interview with John Dysart this afternoon to catch up on energy, and everybody has discovered the energy crisis now. We're all talking about it. But the Fed could have raised the target for Fed funds a point, and it wouldn't really matter, especially to the long end of the yield curve. I think this was mostly about them catching up to the narrative, if you will. But in a longer term sense, Julia, what we're seeing here is a reset from 15 years of Fed action in the bond market, where they pushed down interest rates to very low levels, and people got used to that. But I can tell you, in the housing sector, we're going to see death and destruction this year and next. Companies are going to go out of business, we're going to see higher default rates, and it's going to be a return to normal. But because inflation is going to be persistent, the Fed may not be able to ride to the rescue, as they have in the past. This is something I've been focusing a lot on with my clients and with people in the industry. I did a discussion yesterday with Rob Crispin, who is the scribe of residential mortgages. He's a great guy.

I said, look, we may not see lower rates, so you've got to get used to this. That's going to be a tough adjustment.

Julia La Roche (3:37)

As you point out, it's like that reset after 15 years, getting back to a new normal that a lot of us are used to.

Chris Whalen (3:44)

Seven is not that high in historical terms, but in relative terms, looking back since the great financial crisis, it is quite high, and it is causing huge stress in private equity and private credit, by the way.

Julia La Roche (3:57)

Well, we know that Warsh has acknowledged that inflation is too high, but do you think that his kind of focus on inflation is kind of pointless or it's not really going to do much?

Chris Whalen (4:10)

Well, rhetorically, he's not out there trying to turn the tide, if you will, in terms of perception. So I think the market is going to continue to do what it's doing, which is that we see higher rates. However, spreads have been coming in, which is the difference between corporate bond yields, for example, and treasury yields. That indicates that people are buying paper. In other words, the dogs are still hungry. They want assets. However, there is also an issue if you can't go out and raise money. There are a lot of sectors right now in the non-bank space, private equity portfolio companies, mortgage companies, who are having a hard time raising money.