Pain Ahead For Markets As Interest Rates To Rise "For Generations To Come" | Chris Whalen

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Chris Whalen (0:56)

So my sense is 10-year Treasury keeps going up. I think it could be, you know, five and a half, five and three quarters in the next year.

And, you know, Trump is complaining the rates are still too high. When in point of fact, they are as low as we're going to see, probably for generations to come.

Adam Taggart (1:22)

Welcome to Thoughtful Money. I'm Thoughtful Money founder and host, Adam Taggart. Welcome you here to this special discussion with banking analyst, Chris Whalen. He's chairman of Whalen Global Advisors, LLC, and he's an expert, as I said, on banking, mortgage finance, and the fintech sectors. Chris, thanks so much for joining us today.

Chris Whalen (1:39)

Thank you for inviting me, Adam.

Adam Taggart (1:41)

All right, Chris, there's a lot I want to talk to you about. Now, I'll show my cards early.

The big question I want to ask you about is rising bond yields and the impact, if any, that it's having on the banking sector. But before we get there, just at a very high level for folks that maybe aren't quite as familiar with your work, I want to give them just a little bit of a 30,000-foot view on how you see the world here. As you're looking at the economy to date and at the financial markets and they're not necessarily the same thing, how would you categorize each right now?

Chris Whalen (2:12)

I think with the economy, we're running hot. We're running a $2 trillion deficit. The Treasury is the dog, the Fed is the tail. We're in an age of fiscal dominance that is ebbing pretty rapidly actually if you look at the bond market. But I think what is really striking is that we're in a period of reset. In other words, since 2008, our central bank, other central banks around the world, kept interest rates very low. They provided a lot of accommodation, that's over. So the question I get asked constantly by people in the mortgage world, for example, is, you know, winter rates going back to 5%. And my answer is, well, we're not going back to 5%.

You have to learn to run your business at 7 or 8 And that's just not something people are prepared for. With the banks, I think after an extraordinary year last year, which was largely driven by the Fed, you know, how can we say that Jerome Powell didn't give Donald Trump everything he asked for when he cut rates three times in 24 and three times in 25?

And, you know, the stocks performed accordingly, right? I don't think people know what to do with banks right now because we're at the bottom of 7, 8 quarters of falling credit expenses. Wall Street's been hot, right, in the first half of the year. Not so much now.

Loan growth is modest, to say the least, except for all other loans, which is margin lending and hedge funds and private equity, right? So I don't know what to do with financials. I got out of Schwab a couple of weeks ago with a very nice gain. I actually put down some short positions on a couple of consumer lenders because I think credit costs are going up because of the war in Iran and other factors, energy prices, food prices, you know, anything you want to name. But the consumer is under stress and yet they keep spending money, right? Do you see the headlines?

Adam Taggart (4:12)

So let me ask you this.

It feels like a long time ago, but folks still remember the failure of Silicon Valley Bank and was it Signature Bank and a few others at the same time? And that was largely due to the fact- First Republic. Yeah, First Republic. And that was largely due to, you know, rates moving up quickly and they were sitting on these, you know, big safe treasury positions that they were now under water on, well, gosh, treasury yields have shot the moon this year. How much pressure is that putting on banks right now? And should we expect, you know, some failures here to start popping up?