#416 Chris Whalen: Cheap Credit Is Over, K-Shaped Economy Becoming an L, Long Energy & Short Financials

Julia La Roche (0:01)

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' latest on why he is concerned about credit, especially with the cost of credit going up, and why now he thinks is the time to be long energy and short financials. I really enjoyed this conversation with Chris. We love doing this for you all every single weekend. I hope you all enjoyed this one as much as I did.

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 (0:56)

Hey, nice to see you, Julia. Another week in paradise, right?

Julia La Roche (1:00)

Well, you're in paradise. I'm up in the city hanging out with Matt, which is actually a ton of fun. We've had a bunch of great interviews coming on The Julia La Roche Show.

Chris Whalen (1:07)

Yeah, we'll do some city interviews soon.

Julia La Roche (1:09)

I know. I can't wait, Chris. All right. We got to talk about what's going on and continue to go on with yields, the bond market continuing to back up. We did get the jobs report this morning, 29,000, well below expectations of 90,000, which yields did decline this morning on the heels of that jobs report, but they're still so elevated.

What do you make of what's happening in the US bond market? What is your read on it?

Chris Whalen (1:41)

I think when inflation is going up, interest rates have to go up commensurately.

The treasury yield has been understated for a long time, going back to 2008 We've talked about this, the Fed essentially suppressed interest rates to help the economy and prevent contagion. When you see interest rates move in the way they have been, it's because expectations regarding inflation are pushing them higher. Very simple.

Julia La Roche (2:11)

Yeah. When it comes to inflation though, Chris, is the read on it that inflation is much higher than the statistics are actually indicating?

Chris Whalen (2:24)

Yes.

That's always been my rule of thumb, especially for consumer price based statistics. I'd like to look at producer prices because that is a little bit, I think, more reasonable of a time series in terms of the data and the inputs and the adjustments. Bureau of Labor Statistics plays around with that number quite a lot, remember? They adjust for seasonality, they adjust for all these other things.

Inflation is something you experience individually. It's very hard to aggregate it and average it. But I think for most people, mid-single digits, if not high single digits, is what they are experiencing today with their own lives. Whether you talk about gasoline or diesel or food, that's what's important. I think the bond market is reflecting this, Julia.

Julia La Roche (3:17)

We're already in to the month of October. I can't believe it. By the way, prices for The Institutional Risk Analyst went up. If you all didn't subscribe, you better subscribe with that discount code. I know. Yeah.

Chris Whalen (3:27)

That's right. You got a discount code with Julia. We got a lot of subscribers, by the way. I appreciate your help.

Julia La Roche (3:33)

I love it, Chris, and they certainly love hearing from you and there's so many other benefits to The Institutional Risk Analyst as well, including your quarterly calls as well.

At the end of the month, we'll have the FOMC, the last before the midterms. If you had to handicap it right now, what do you think in terms of rates or Fed funds rate? Will we see a hike? Maybe they will do nothing. What do you think?

Chris Whalen (4:01)

I think they may stand pat in October and maybe raise in November. The reason being, just what we were talking about, the sources of inflation are coming from areas like scarcity, like the war in Iran, the war in the Ukraine. So all of these factors are beyond the ability of central bankers to really affect unless they're going to drive the economy into a recession. As we wrote this week in our last blog post, there's very little political tolerance for putting people out of work so that we can fight inflation. This isn't like the 1980s with Paul Volcker.

So for the same reason that people are not inclined to raise taxes to fight the budget deficit, they're not inclined to embrace monetary austerity to fight inflation, especially if that inflation is coming from war and other factors that have nothing to do with monetary policy.