Chris Whalen on why easy market gains may fade
Chris Whalen argues that investors may be focusing on the wrong risks.
While markets remain captivated by AI and expectations for lower interest rates, he believes tighter liquidity, fragile credit markets, and disruptions to global energy supply chains are quietly reshaping the investment landscape.
Those shifts, he contends, could have far greater consequences for inflation, housing, and portfolio construction than many investors currently appreciate.
In this episode, Whalen examines why he believes the AI boom is approaching a turning point, why credit markets appear more vulnerable than headline indicators suggest, and why geopolitical tensions could keep inflation elevated despite slowing economic growth.
Watch or listen to the episode now.
Transcript
Chris Whalen
President Trump did the deal with the Iranians because he had to. We were running out of time. The globe is facing a terrible shortage, not so much of oil, but of refined products. And I think as we go into the second half of the year, we may see rationing in some parts of the US simply because they don’t have enough product. I’m particularly talking about gasoline, diesel fuel out on the West Coast.
And the other key thing is things like sulfuric acid, which you need for fertilizer. That’s kind of important. The Chinese have stopped exporting sulfuric acid. These are all products that came from the Persian Gulf. And very interesting, what did the Iranians hit in the Persian Gulf? The 3 most important facilities for producing lubricants, synthetic lubricants particularly. You need those for planes, gas turbines, high-end vehicles, on and on. So I think metals are weak as a result of what’s going on in the markets. We don’t really have a narrative right now. It’s kind of broken down. And meanwhile, I’m buying silver. I love the weakness.
Trump’s Iran deal and the global fuel shortage
Monetary Metals
It’s great. Welcome back to the Gold Exchange Podcast. My name is Benjamin Nadelstein. I’m joined by our good friend Chris Whalen. Chris is the chairman of Whalen Global Advisors. Chris, welcome back to the show.
Chris Whalen
Hello, Ben. Nice to be here again.
Monetary Metals
Chris, we’re having such a fascinating time in the market. Obviously, the war in Iran has taken a lot of the air out of the news cycle with President Trump. But talk to us about what you’re seeing in the market, maybe something that investors are missing. Obviously, before we started hitting record, we talked about credit spreads. Talk to us about what Chris Whalen’s seeing in the market maybe that other investors are missing.
Chris Whalen
I think the AI bubble has kind of reached its near-term zenith. You know, really doesn’t matter what other asset class you were in, gold, silver, crypto, they’ve all been chasing AI because it was moving so much. It’s what I call the shiny object thesis. So, you know, when things move double digits, people pay attention. And rightly so. I’ve always told our readers, you have to have a barbell between precious metals on the one hand and things in fiat that either have a lot of yield or that happen to be topical.
So I think, you know, President Trump did the deal with the Iranians because he had to. We were running out of time. The globe is facing a terrible shortage, not so much of oil, but of refined products. And I think as we go into the second half of the year, we may see rationing in some parts of the US simply because they don’t have enough product. I’m particularly talking about gasoline, diesel fuel out on the West Coast.
Monetary Metals
Why?
Chris Whalen
Because the green zealots, uh, forced California to shut down all of their refineries. They do not refine energy in California, and frankly, they couldn’t anyway because you have to match the type of oil with the type of product you want to get out of the refinery. The US has been exporting diesel fuel. I think we may stop doing that pretty shortly. And the other key thing is things like sulfuric acid, which you need for fertilizer. That’s kind of important. The Chinese have stopped exporting sulfuric acid, and these are all products that came from the Persian Gulf.
The Gulf states made themselves the most efficient producers of all of these things. So the world over the last 20 years or so has optimized around buying this stuff from the Persian Gulf. And very interesting, you know, I ran an interview with my friend John Dysart this week in the blog. What did the Iranians hit in the Persian Gulf? The 3 most important facilities for producing lubricants, synthetic lubricants particularly. You need those for planes, gas turbines, high-end vehicles, you know, on and on. So I think I’m, I’m seeing kind of double-digit inflation by the end of the year.
Because of the war. I think metals are weak as a result of what’s going on in the markets. We don’t really have a narrative right now. It’s kind of broken down. You notice that AI, only people like Elon Musk have gotten out with their IPOs. I think Anthropic and the rest of them may be late, which is an interesting thing to ponder. So, you know, the other big thing I’m writing about for Friday is liquidity.
Liquidity is tightening. Interest rates are up and all the companies that were hoping to roll their debt at lower rates over the course of this year and next, no, it’s gonna be higher. So I think you’re gonna see higher default activity. Credit’s gonna become a bigger factor for people. It’s quite a change. And meanwhile, I’m buying silver. What can I say? I love the weakness. It’s great.
Kevin Warsh, the Fed, and the end of easy trades
Monetary Metals
And what do you think about this kind of, we’ve lost a narrative. There’s not maybe a super strong AI play as there was a few weeks ago. The Iran war and the oil crisis maybe is changing from, you know, specific the oil and gas to maybe these other byproducts. What do you think is going to take up the mantle as that next part of the narrative? Is it going to be Kevin Warsh and how he deals with some of these inflationary pressures? What do you think is that next step in the narrative for the market?
Chris Whalen
Well, I think Warsh was very much what I expected, which is he’s going to do less. He’s going to say less and do more in the background. So he is going to make some significant changes in how the Fed operates. He’s going to narrow their focus back to monetary policy, probably get rid of forward guidance, get rid of these idiotic dot plots. I think you’ll see governors appearing in the media much less. He’s already indicated he’s not going to do that.
So, you know, you have to follow the example, right? My sense is he’s going to try not to raise the target for Fed funds. He can’t control the long end of the yield curve. That’s already up. We’ve already got our hike. I think he will still try and advance his idea of shrinking the amount of reserves in the system. He’s gonna tell banks, go out and buy T-bills as reserves. He wants them to use the discount window and they’ll get credit for that, right?
What does that mean? It means that not so much that it’s gonna help inflation, but it is gonna change the way money markets work. And I think over time it’s gonna have a significant impact.
So the narrative, I think, for this next half of the year is going to be about trying to figure out what we do in terms of assets after several years of easy trades. I mean, come on, we had boring stocks like banks last year up double digits. That is not normal behavior, especially when you look at the earnings. Nothing special, right? But you had a number of surprises in the market that gave people opportunities to buy cheap. They did. And then the things ran up. AI, the spend is colossal. Are we going to make money on AI? No one’s sure. We are sure we’re going to have a lot of debt as a result.
So I think that we are going to have to figure out what the next part of the game is from Wall Street. And I’m not sure they know. The mortgage market in the US is back on its heels because, you know, the 10-year bonds at 4.5%, that means we’re doing 6.5%, 6.75%, 30-year fixed-rate mortgages. That doesn’t get anybody excited. So we’re going to see lots of consolidation in the housing sector. I mean, a lot. And you’re going to have other parts of the economy, I think, relatively slow versus where they were 2 and 3 years ago.
Rates haven’t moved that much, you know, in historical terms, they’re not that high. But still, in relative terms, it is a big change. And I think everyone was betting on lower rates, Ben. That was the bet. And since we’re not going to get that, you’ve got to go back to the drawing board and say, okay, where do I put my assets? Where do I find safety so that I can preserve capital?
And, you know, for me, I’ve been getting back into some of my more stable energy stocks— Chevron, Williams, a pipeline operator. I’ve been buying lots of Annaly, PennyMac Mortgage REIT. You know, these are mid-teens yield propositions. And as the metals have been coming off, I’ve been buying more. You know, it’s a gift that keeps on giving.
Gold, silver, and the physical metals shortage
Monetary Metals
And what do you think about this correlation that previously has kind of broken down between the Fed’s fund rates and gold? Historically gold prices have kind of been hurt by the opportunity cost of high yields on treasuries or money markets. Do you think that that correlation might come back where people say, hey, this higher for longer kind of rate cutting cycle we thought was coming isn’t maybe coming as soon as it is. Where do you see gold and that correlation going forward?
Chris Whalen
You know, I’m not sure myself that there is actually a correlation between the two. I think investors have to make a choice. And when you see metals moving double digits last year, when you see silver in the first quarter of this year skyrocketing like some kind of AI stock, that drew a lot of attention. The natural buyers of metals, gold obviously is central banks. The reserve position of central banks is now bigger than the dollar in just absolute terms.
Silver is a fascinating story because it’s mostly commercial demand. Anything in electronics requires silver. The Chinese have been big buyers. They continue to be big buyers of physical. And when you go into these markets, Ben, you often get a price quote, right? And then you say to them, “Uh, how about TRAXX?” And the price goes up 10 or 15% to actually take physical delivery.
So there’s a breakdown between what the financial markets are telling you the pricing is for gold and silver and what the actual price is if you want to take delivery. So for example, the Chinese have chased all of the speculators out of the gold and silver market. You have to be, prepared to take physical delivery now in Shanghai.
The Indians have had interesting issues with respect to both metals. They actually suspended delivery for a while ’cause they’ve had some import problems. So I think overall the shortage of both metals is striking. And the question is, how long do we have to wait before that physical aspect in the market takes over again?
‘Cause there’s always a battle between people who take delivery of this stuff for whatever reason, and then the financial markets in London and Chicago, which tend to have a different agenda. I’ve never been convinced that there was a really strong relationship other than the shiny object thesis, which is if rates go up a lot, then obviously people are gonna take advantage of that.
Monetary Metals
What do you think about this relative game that’s happening between the US, these other economies, Europe, China? Obviously this oil crisis has hit certain economies in certain countries harder than others. What does that do for a macro thesis in general for investors who are thinking not only inside the US but also outside of the US?
Chris Whalen
I think first and foremost, a lot of nations are going to go back to a self-sufficiency model. They’re going to be looking at ways that they can cushion the impact of the war on their consumers. So for example, in Korea, they have slowed down production of things like lubricants and other products so that they can prioritize diesel fuel. Diesel fuel is what runs most global economies. You know, gasoline is kind of a political issue at the pump. You always talk about that, but it’s diesel fuel that moves products and then ripples into the cost structure.
So I guess, you know, if you’re a global investor and you’ve been playing economies like China, you have to realize that China itself has been buffeted by the high price of oil. They have gone extraordinary lengths to have alternatives, use electricity, et cetera. But still, they are impacted by this quite a lot. You see it in their production numbers or industrial numbers. And then more importantly, their customers around the world have also been impacted very severely. You know, and then you look at the Ukrainians who seem to be getting the upper hand in this ridiculous war.
And they just whacked the refinery outside of Moscow again. The ability of Moscow to export both petroleum and refined products is kind of a marginal factor in global energy supplies, but it’s still important. It’s like if we had taken the Iranians offline permanently, that would have a big impact. So when you’re looking at global markets, you gotta say to yourself, how has this economy been impacted by the war? And what’s it going to look like a year from now, assuming we have peace? I’m not sure how long this peace is going to last, but we’ll see.
Tight credit spreads and private credit risk
Monetary Metals
Why, in your opinion, are these credit spreads so tight? You would imagine in this type of environment with this context— exactly— you would see credit spreads kind of blowing out more than they are. Why are credit spreads so tight, in your opinion?
Chris Whalen
It’s a fascinating question you ask, given how rates have tightened and gone up. You would think spreads would widen, natural historical relationship, right? But the difficulty is there’s still so much money chasing yield out there. Institutional investors, pension funds, whatever you wanna say. That’s, I think, the reason that spreads are so tight. People figured, well, you know, I want to be involved in this and that, or I’ll buy distressed assets and put them into a servicer and see if I can get some value out of them.
So to me, the inflation is very obvious in the financial markets globally, and that’s why spreads are so tight. They’re at historic lows right now. And you would think, wait a minute, the AI stocks are trading off. Are spreads going to widen? What’s really interesting is that Moody’s put out a piece this week talking about how something like two-thirds of all of the distress situations now in corporates involve private equity. Okay. And private credit.
So that tells you what’s going on. The Street made a big mess and they’re still not showing us the full totality of this mess. We, we’ll see it over time, but it kind of dribbles out in little bits here and there. You don’t get a global view because it’s private and the private equity firms lock everybody up under non-disclosure agreements so they can’t talk. It’s fascinating.
Monetary Metals
How important in terms of a systemic risk factor do you put some of these private equity or private credit instruments? Because like you said, there’s this kind of opacity to them in some way. It’s hard to tell what’s going on. But in a way, that also means it’s hard to tell what these private credit funds or private equity funds are connected to in public.
So how important systemically do you think these are? Are these something that can kind of fail and, hey, the investors who are part of them take this haircut without some broader implications? Or do you think that investors should be focusing on the issues happening in private equity and saying, hey, I should make sure that my portfolio is constructed in a way that I’m somewhat hedged against this potential risk?
Chris Whalen
I think you definitely want to ask questions about the assets in your portfolio. You may not get satisfactory answers from the sponsors of these schemes. You know, systemic events occur when people are surprised, when there’s something out there that takes them unawares and all of a sudden they have to scramble and make changes.
You saw a little bit of that with Apollo and BlackRock and the rest of them. When they had to suspend redemptions on these funds. You may also see that with some of the business development corps, which invest in the debt of these private companies. They have limited leverage, but still they’re fully exposed to default.
Just as there’s been a big bid for paper in the corporate market, there’s been an enormous bid for people who are willing to take credit risk from other parties. So banks, the more astute banks have been sellers of credit risk. Other funds have been buyers. They think they’re smarter than everybody else. But I do think there’s a reset coming, maybe not a systemic reset, but you could see a substantial sell-off. I’ve been getting out of most of my tech because I did very well.
I had AMD and Arm and a variety of things. I used to cover semiconductor capital equipment when I was a younger man. And you know, now nobody even knows who these companies are. They don’t pay any attention to them at all. But the fact of the matter is you have companies that were basically going sideways for 5 years, suddenly go up tenfold in less than a year.
That’s probably going to correct at some point is, you know, my judgment is Micron worth a trillion dollars. Love the company, by the way. But you know, I don’t know. I think in a lot of ways the reference points that we used to use for judging value have kind of been swept aside by this whole AI thing. I do think it’s a bubble though. And I do think it is gonna sell off. That’s why I’m out. I’ve been telling my flock to go defensive, and I’m gonna amplify that message this week.
AI data centers, the S&P 500, and bubble risk
Monetary Metals
And Chris, I want to talk to you a little bit about this politics behind AI. A lot of people say, oh, AI is going to do this, it’s going to do that. But the politics on the ground for data center buildouts for these AI kind of companies is really not very favorable. Where do you see this?
Is this going to be like the nuclear renaissance that kind of never comes because on the ground people just don’t like the idea of nuclear energy? Or is somehow the money with AI going to push through and make people say, hey, listen, we’ll pay you off. Every teacher in the state’s getting $50,000 if we can build a data center here. Where do you see the politics of AI kind of unraveling?
Chris Whalen
I think your analogy to nuclear is very apt because the politics of this are bad. If you’re now looking at building a new data center, you’re late. Look at Loudoun County, Virginia, outside of Washington. There’s a couple hundred data centers there, but they were built years ago. I do think that the industry is gonna have to figure out a way to amass the computational resources they need in a different way.
You know, when Elon Musk was talking about putting it in space, he’s absolutely right. The only trouble is putting high-end chips in space is very difficult because you have to shield them from cosmic rays. You know, others are talking about putting data centers at sea. So that they can use the ocean for cooling. That’s probably a better idea. But one way or another, you know, I always joke with people that AI is still ultimately an electronic parrot. It regurgitates whatever it hears. So how many large language models do we need? You really just need one.
And I have a funny feeling that the industry is going to slowly collapse into a single model with many uses. Thereby achieve some efficiencies. Because it makes no sense to have people scooping up the same public source language, feeding it into a computer, and then trying to, you know, develop AI models with it.
I’m actually in the process of suing Anthropic for stealing some of my written work over the past few years. So, you know, I have mixed feelings about these guys and their efficacy in terms of delivering economic value.
Monetary Metals
And if this doesn’t work out, if this whole AI bubble becomes a bubble, or, you know, it’s just maybe not as exciting as people initially thought it was, what does that mean for things like the S&P 500 now where lots of these companies, the value of the S&P 500 is really concentrated in these AI companies? Is this going to be an issue for someone who’s kind of a passive investor in the S&P 500 going forward?
Chris Whalen
Yes. And let’s remember the S&P hit a new high about 10 days ago. Has traded off since then. So the ETFs, the passive trade, have been chasing this higher and higher. Think about Oracle. Think about all of the other companies that we’ve mentioned, that we haven’t mentioned. They all basically have the same problem, which is that they’ve run up dramatically because of the hype around AI and the spend. You can see the dollars, but there’s a lot of leverage behind that spending.
So Oracle, for example, great company I’ve followed for many years. They’re basically insolvent. They rolled the dice so hard to try and get ahead of the game in AI, building data centers, committing to not only build them, but, you know, equip them and everything else. I don’t know how they’re going to pay off that debt. I think the company is eventually going to have to swap the debt for equity and dilute the hell out of their shareholders.
So you could see some really interesting restructuring coming out of this as time goes forward. Because again, let’s be fair, if you look at the information we have today, it’s hard to really justify the spend versus the cost that these companies are incurring.
Monetary Metals
Yeah, especially if that commodification point that you made earlier does come true, where why do we need 10 different AI models? They all basically do the same thing. You know, if someone charges $20, but I can get the same thing basically for $5, there’s this race to the bottom. So where does the profit, where does that kind of monopoly profit come from if you don’t ever—
Chris Whalen
Oh, they want it to all do IPOs. You know, greed is the major factor here. But think about it. All you really needed, Ben, was a single library of all known data. Language is what they’re really using. And then let people rent access to it and do other stuff with it because it’s the implementation which is the real art in AI.
The language base that they use for training these systems is pretty much universal. There’s no need to have more than one copy. In fact, I would argue having one well-curated copy would be better than having multiple copies, which may not be the same or may be a bit of a mess in terms of how they were compiled. So we’ll see. This is typical of any gold rush. That’s what the way I view this. The companies that are selling picks and shovels are the ones who are benefiting right now.
Crypto, passive investing, and AI trading agents
Monetary Metals
And I want to talk about a previous gold rush that maybe is now not so shiny in terms of that shiny object syndrome that you mentioned, which is this crypto play. A lot of people were really excited about crypto. It had these double-digit, triple-digit, quadruple-digit returns. A lot of people rushed into the space, but now we’re kind of seeing a lot of that shine move to the AI sphere. Do you think that if the AI bubble kind of loses its shine, that maybe crypto or gold or these alternative assets get that wave of capital again? Or do you think that, no, sorry, the shine is off permanently for this kind of crypto economy?
Chris Whalen
I’ve been watching Mike Saylor slowly drown in his own rhetoric. I do think crypto is yesterday’s trade. I think the smart money was out years ago because the percentage increase was so high. In the early period, and it was a typical kind of Ponzi situation. If you were astute enough to be in early, you did really well.
But I think people who’ve been playing with crypto over the last couple years, including the Trump children, have kind of missed the boat. I don’t think that it can survive in its current form because, you know, remember, this was supposed to be a stable means of exchange that wasn’t controlled by any government or political system. And instead what it became was a speculative vehicle.
So, you know, people are still hoping that stablecoins and things like that are going to offer some value. I don’t really see it. I think tokenization of a variety of assets is going to be a more enduring model in terms of the utility it brings. I think that players like MicroStrategy are the end. I really think, you know, he’s the last of the Mohicans. Wall Street really, I think, did a lot to destroy Bitcoin by building all of these ETFs.
And it was great when it was going up, but the problem with passive strategies is that when they go down, they go down a lot. And it doesn’t even matter if you have native buying because the ETFs are going to be selling so much, especially as the price decreases accelerate.
You’ve seen this in the past month or two. The price changes in a given day. Have been gapping by percentage points at a time. That’s not a good indicator. So I think you notice Wall Street’s very quiet on crypto. The BlackRocks and everybody else have been slowly selling and tiptoeing away. They’re not advertising this stuff as much as they were. So I think the bloom’s off the rose when it comes to crypto.
Monetary Metals
And I want to ask back about this passive investor who obviously a lot of our listeners are passive investors, whether in the S&P 500, they do index funds. What should they be thinking about, whether it’s these crypto, it’s AI kind of unraveling and how that matters to the passive investor? Because in a way, you know, we’ve talked about how people are valuing the markets not on revenue or cash flow or profit, but maybe on this kind of hype cycle. What should passive investors be thinking about going forward?
Chris Whalen
Well, you know, if you have a 401, you are a passive investor. That’s all the choice they give you. You have to put your money into funds. I still pick most of my own stocks, although I use ETFs. For things like gold and silver, the miners, because they are able to give me exposure in a much more efficient way than I could do myself.
So what I would say to people is if you have the time and the expertise, in other words, you have to do your homework. You know, watch Jimmy Cramer, right? He always says, go do a couple hours worth of homework on the stock and then make your decision whether you want to buy it. But I think people ought to try and diversify out of passive strategies alone. Simply because they’re all going to go up and then they’re all going to go down.
That’s just the nature of the beast. So far, because of the cash inflows, the tendency has been for the passive strategies to lift the entire market. And I’ve benefited from this. You know, if you look at the large caps in the S&P 500, they’re in so many ETFs, and those ETFs are constantly receiving new cash that it’s almost impossible for them to go down.
However, as the demographics change and we start seeing a larger flow of cash out of the markets for retirees, and that’s happening now, then, you know, it may get to be a different dynamic. Mike Green at Simplify has written about this extensively. He’s a dear friend. I really think that he’s got it.
But the other funny thing, I’m going to be doing an interview with an old friend of mine next week, talking about agents. There are now agents that are trading these markets too. So in addition to passive strategies, you have people creating agents that have money behind them and they buy and sell stocks and essentially manipulate them up and down and take the spread over a relatively short-term period of time. That used to be illegal, wasn’t it, Ben?
Monetary Metals
Yes. I think lots of new trading strategies with agentic money will in a lot of ways change the market in ways that, yeah, maybe were previously illegal or maybe previously out of favor or just too difficult to do. But now with these agents, might be possible. What other kind of agentic issues do you see coming forward? Because I think a lot of people think, oh, hey AI, tell me what type of portfolio I should have. AI, tell me what stocks I should pick. What do you think are some of the risks going forward with that agentic kind of thinking?
Chris Whalen
Well, it’s like anything else. If it gets to be too large and it starts to dominate certain markets, certain stocks, it’s going to hurt public confidence in the marketplace. I think that’s already happened. So they are kind of the Wild West. They’re not regulated. SEC under Paul Atkins is, you know, focused on other things.
But there is a desperate need, I think, to bring a little bit more discipline back to the financial markets. I’m speaking as a member of FINRA here. I don’t like what I see when it comes to trading and the use of nonpublic information. So, you know, it is what it is. We’re in the Wild West. It’s like it’s a century ago. I keep telling people it’s the mid-1920s. We have AI technology, we have other things that we didn’t have a century ago, but the atmosphere of speculation of it’s different this time around.
And I think also the entitlement of institutional investors who are playing in these AI schemes and who just figure they’re gonna make money one way or another. That kind of worries me because if you don’t have fear, to go along with the greed, then the greed’s going to get out of hand. And I think we’re already there.
Monetary Metals
And talking about that kind of speculative nature of this market that we’re seeing, where do you see these prediction markets? Obviously, these are for some institutional investors’ way to hedge risk that they otherwise couldn’t. But for a lot of people, it’s just a new way to do sports gambling in your state that you previously couldn’t. So where do you see this kind of prediction market, these different apps, these different offerings Are these useful tools for some traders, but kind of dangerous, toxic for others? Where do you fit this prediction market offering in your ideas?
Chris Whalen
They’re gaming instruments. I don’t really think of them as investing. They ought to be regulated by the state gaming commissions. That’s what they are. And yet, you know, crypto managed to be opted out in terms of being dealt with as a security. So these prediction markets have gone down that same road. They’re not a security., but it’s not traditional gaming.
Some of the states have gone after these platforms and sued them on this basis, and I think that’s appropriate. Prediction markets are simply a form of gaming that’s enabled by technology. This legislation actually that’s, uh, moving through Congress that would prohibit members from playing in this, uh, realm. But on the other hand, you can bet on World Cup games too. You know, like I say, this is nothing more than Classical gaming with a different veneer.
Midterms, inflation, housing, and affordability
Monetary Metals
All right. Let’s talk quickly about the political landscape. Obviously, the midterms are coming up. These prediction markets are predicting that maybe the Democrats will add some seats. Where does that mean for investors going forward who maybe were bullish on some of the changes that President Trump was making, bearish on others, but now with more of a kind of stalemate, where do you see the markets going forward saying, hey, legislation out of Washington is likely going to be a bit slower potentially going forward?
Chris Whalen
Only a few congressional seats are actually competitive. So even though the president has not done himself any favors in certain respects with some of his decisions, most Americans are not that focused on Washington. So ultimately it comes down to the economy, inflation, fuel prices, things like that. That’s what’s gonna get people’s attention. The cost of living, the cost of housing, you know, affordability I think is still the issue. It was at the beginning of the year, and now I think with the war with Iran and other factors, it’s more of an issue.
Rising interest rates have made housing extremely expensive. So, you know, it’s like everything else. If you’re buying a house or buying a car, you’re looking at the monthly cost. And I think right now affordability is going to be driving a lot of this.
That said, you know, the Democrats are still remarkably unpopular. They have not been able to field any decent national candidates. They’re not positioned at all for the presidential run. If they end up with Gavin Newsom in California, I think they’re gonna get their clocks cleaned again. So you might end up with a Democrat Congress, maybe a Democrat House, Senate may be a toss-up, and then you could end up with another Republican president.
You know, look at, uh, Ron DeSantis here in Florida. They’re getting ready to put up a constitutional amendment. They already have to vastly reduce property tax. That’s going to be a very popular initiative. I think if you have that debate on a national platform going into the presidential election, that’s going to be very interesting because, you know, I left New York in part because property taxes were going up every year. I had to make about $100,000 a year just to pay my property taxes on my house.
Now that is a big issue for Americans, and I think that’s going to make the politics a little bit more difficult to predict because, yeah, the Republicans have screwed up. Mr. Trump has done some demonstrably wacky things, but he’s also done a lot of really good things. It’s not going to change the balance that much, I don’t think.
Monetary Metals
And what about this affordability crisis? Do you think is likely to change anything, if at all, going forward? Obviously housing, a big component, gas prices, food prices, this kind of CPI inflation that people are always looking at in the headlines. What do you think is going to materially change the affordability crisis issue, or do you think it’s a lot more of the same going forward?
Chris Whalen
I think really, you know, the bottom line is that the Fed created the housing price problem during COVID They did too much for too long, and that’s not gonna change, unfortunately. It would be nice if we could see home prices go down, but The Fed is so reticent in terms of allowing periods of deflation because they’re worried about the Treasury market that I think we’re gonna have to live with home prices where they are.
And again, this goes back to what we were saying about AI. Is this enormous change in the valuation of some of these stocks simply gonna be permanent? Is it because there’s so many paper dollars chasing so few real opportunities? I think that’s an open question. So I don’t expect to see much relief on housing. You’d have to have interest rates fall a lot in order to get housing back to where people would like it to be.
But, you know, was COVID normal when we had people getting 2% 30-year mortgages? No, not at all. In fact, the average coupon today is probably around 5%. That’s normal, but we’re not right in 5s right now. We’re closer to 7s., and I think that’s gonna really take a lot of wind out of the sails for the housing sector.
Monetary Metals
Now I want to ask you about real estate because obviously we’ve been dancing around this asset for a little while in our interview here. What is the kind of future of the real estate market from commercial to residential? Obviously for the Fed, they are worried about lower housing prices. On the commercial side, we are seeing lower housing prices because of this debt that is coming due every year at higher rates.
Do you think that over time, because we’ve had this work from home, that there’s been a structural shift where, hey, we’re just not going to see residential housing prices materially fall? And what does that mean for the future of younger generations who want to own a home? Is that part of the American dream just going to have to shift over time because of structurally higher real estate prices? What do you think is the real estate asset story going forward?
Chris Whalen
Residential assets are kind of stuck. I don’t think you’re going to see prices come off very much. Commercial, it’s very interesting. New development is rocking. Older assets, no. People want new and they like new houses. That’s the reality. They tend to like new construction versus older homes. In multifamily, same thing. Older properties are really difficult to finance right now. Many of them have had to go to HUD or Fannie and Freddie to get financing.
And I would expect that’s going to continue simply because Again, when people are looking at an apartment or a condo, more likely they want something that’s new that they don’t have to fix, is what it comes down to. The cost of renovation is very high. So, you know, after COVID, the loss rates on multifamily properties almost immediately went back to normal.
Today on residential housing, especially bank-owned properties, the loss rate’s basically zero because the prices have stayed so high. You can have people default today. And there’s almost no impact on them. So that’s a remarkable thing. And I don’t expect that to change. The, the Fed is not gonna raise rates enough to make home prices go down.
We’ve got to 8% a couple years ago for a whole week. And that’s about as long as I think they were gonna tolerate it. Imagine what it would take to actually force home prices down, given the lack of supply. And you are starting to see states and localities deal with this. By changing their zoning rules. That’s really the only way you can deal with it. You have to let people increase density in existing homes. You have to allow people to build in properties. Maybe they would have done one house in the past. Now they’re going to put in a 4-home multifamily. That’s what’s going to change. But that takes time.
Monetary Metals
And what do you think about this idea of people moving with their feet? They’ll vote to go to more red states with better zoning and maybe away from these blue states with higher taxes. Do you think that that almost naturally will solve some of these problems, that there will only end up being an affordability crisis in these kind of more highly regulated states, and the red states and the less highly regulated states will not have that same affordability crisis?
Chris Whalen
That’s absolutely the case. I mean, if you look at New York, there is very little new construction in urban areas. So I was able to sell my home earlier this year and basically doubled the price over 5 years, which is crazy. But it’s because there’s no new construction and people also are, you know, reluctant to spend money on renovations. Homes decay over time. The property goes up in value. So the improvement on a property is always where you lose value, where the land tends to go up.
It’s like owning gold and silver. That’s the tangible asset. Whereas the improvement, You gotta constantly be spending money on it to keep it at least stable in terms of value over time. It’s always the land component that goes up. And that’s why all of these people who’ve come up with these schemes to separate the house from the property and have, say, an insurance company finance the land, they’ve never been successful because that’s clearly a bad deal for the homeowner. If you’re gonna buy a house, you want to own the land. Because that’s where the value is.
The Fed Put, bond market, dollar, gold, and BRICS
Monetary Metals
And I wanted to ask you now about this idea of, you know, there’s been a Fed put, which is, hey, we never let stock markets go down, we never let housing prices go down, we never let really any price go down, because if we do that, then the politicians get angry at us, then we lose our jobs, and we get in the spotlight. So there’s this been idea of a Fed put.
Do you think that so far that that is basically remained in place in the mind of investors, or do you think someone like a Kevin Warsh is going to say, hey, I’ll be the bad guy. You can blame me, but there’s no longer a Fed put.
Chris Whalen
That’s a very interesting question because, you know, Kevin Warsh has been talking about reducing the size of the Fed’s balance sheet. Why is the balance sheet bigger? Because they had to come in and support the Treasury market during COVID Now, they did too much. They should have done less, and then the balance sheet wouldn’t be as big.
But can Chairman Warsh say to the Secretary of the Treasury, no, I’m not going to rescue you today? That would be a very short conversation. So I, I think that there’s still in the minds of most people this idea that the Fed is gonna come to the rescue, but it’s inflation that’s really been the driver behind rising stock prices more than just the Fed. The Fed comes to the rescue of the bond market, and that’s an important point to make.
Ben Bernanke was right when he decided to buy securities right after the financial crisis. He didn’t stop. Same thing with Janet Yellen. You know, she had James Tobin as a professor and she thought that she could go out and control the long end of the yield curve. She was totally wrong. So there’s a lot of perception both on the part of investors and policymakers as to what they can and cannot do.
But at the end of the day, the Fed is the banker for the Treasury. And then if, uh, the Treasury market gets disorderly, then they gotta come in and buy bonds. That’s just the way it works.
Monetary Metals
Talk to us now about the bond market. Obviously, we’ve seen this long end have quite a divergence from the short end where the Fed plays more of a hand. Do you think that going forward we’re going to see that as well, where really the long end really has its own story, its own narrative, and this kind of idea of the bond vigilante is still true at the long end of the curve, but the short end will remain pretty political with the Fed, you know, intervening when they can or when they need to?
Chris Whalen
Well, that’s always been the case. People may, you know, delude themselves into thinking that whatever action the Fed takes can in turn force long-term yields down. And for example, to help housing. But that’s never really been the case. The Fed is always, like any central bank, mostly had control of the very short end of the bond market, and the rest of it is up to bond investors. It’s up to multinational entities which buy long bonds, our friends in Japan and China. I think that, you know, people fool themselves sometimes just to have a greater sense of security, but the, the chairman of the Fed can’t control the 10-year Treasury. That’s beyond his capacity.
Monetary Metals
All right, Chris, I want to get into a rapid-fire round with you. I’ll ask you questions from all over the map. You can answer as short or as long as you want. So let’s start with our friends in the BRICS nations. That’s Brazil, Russia, India, China, South Africa. Of these countries, which do you think is going to outperform and underperform in the next year?
Chris Whalen
I would say probably Brazil. They have messy politics, but the growth prospects in Brazil are striking.
Monetary Metals
Next rapid-fire question for you is about Latin America. In Latin America, we’ve seen some tension between the US and the Latin American countries. There’s been some pushback. But then there’s also been some collaboration as well. Do you think that this idea of a North American sphere of influence where there’s more collaboration between Mexico, the United States, Canada, as well as the rest of the Latin American countries, do you think that’s going to continue or do you think that that’s going to break in the future?
Chris Whalen
Well, I think it will continue. It makes enormous sense. The North American Free Trade Zone has been an enormous success for Mexico. There’s no reason not to do it. Mercosur has also been very successful for the South American countries. So I don’t think there’s any real reason to attack these structures, but you gotta remember many of these countries are dollarized.
If you look at South America under Mercosur, if you’re looking at real estate, major exports, things of that nature, it’s all priced in dollars. My family members in Uruguay, for example, are indexed in dollars. So there’s a stability. To the American bloc, the entirety of it from north to south, that I think argues in favor of continuing.
Monetary Metals
I want to ask you now about the dollar compared to some of these other currencies, not necessarily compared to gold. Do you think that the dollar going forward is going to have this kind of dominant effect globally on the stage as a reserve currency? Or do you think that actually over time some of these other competitor currencies, whether it’s the euro, whether it’s a Chinese currency, are actually something investors should be thinking about? Or do you think it’s more important to think about the value of the dollar versus an asset like gold?
Chris Whalen
I think gold is actually going to be the counterpoint to the dollar. The dollar is going to continue to be a reserve asset to some degree, but I think gold will be bigger. We may even see silver come back and have more of a monetary dimension. Most nations don’t want to grow their currencies enough. To attract significant flows offshore.
Switzerland is a great example of this. They could easily become a reserve currency tomorrow if they wanted to import the inflation. Same thing with China. China’s not really looking to become a replacement for the dollar. They want asymmetry in both strategic and economic aspects in Asia, but they’re happy to use dollars as a means of exchange. I think it’s important, Ben, to remind everybody the dollar is the only currency out there that has a financing capacity that comes along with it.
So will gold continue to increase relative to the dollar as a reserve asset? Yeah, absolutely. I think it makes sense because it is apolitical. It’s an easy choice for them to make. But the dollar is a really convenient form of exchange, especially since you can finance transactions in dollars and then swap it back in your currency of preference, right?
The Japanese have been doing this for 50 years and very astutely. So I think the Chinese use dollars in this way. They always finance their dollar transactions in Asia and Africa, and then they go into the local currency. So I think the means of exchange role of the dollar’s not gonna change. It’s too easy for other countries.
But do they want to, you know, become a reserve currency like the dollar? No. That brings with it a lot of problems. And you know, the US couldn’t get out of it if we wanted to. It’s a job that finds you, you know, between World War I and World War II, when Great Britain was essentially broke, the US had to pick up the ball. And that’s when the dollar became the global standard. It wasn’t after World War II. It actually started at the end of World War I.
Monetary Metals
Now I want to ask you about some of these other countries like China and Japan, who relatively might be even in a worse debt situation than the United States. Do you think that that’s going to matter soon where Wow, the debt-to-GDP of Japan is X compared to some other country like the US. Do you think that’s going to matter at some point, or do you think this kicking the can down the road continues for far longer than investors can expect?
Chris Whalen
They will try. I mean, the Japanese are probably the most striking example, but the Chinese tend to imitate us in a lot of funny ways. They’ve imitated our New Deal institutions to an extraordinary degree. There are layers and layers of leverage in China that never get repaid. You know, if a locality gets into trouble, they just give them more money. Or if a bank gets into trouble, they advance more cash. The whole system though, as you point out, has a lot of liabilities and none of them are good.
Uh, the US is still, I think, ahead of the game in a sense that we do take our debt seriously. But the problem is our people don’t like to pay taxes. And this is something I wrote about in my book, Inflated. It goes back to the inception of the Republic. So yeah, you’re right. I think the Japanese are probably in more trouble than anybody else because they’re not growing. If you look at the Japanese corporate sector, they’re always investing offshore. They have no choice. There’s not that much growth at home.
Monetary Metals
And let’s talk about the demographic issues. Obviously really poignant in Japan, South Korea as well. How important are these demographic issues going to be for investors?
Chris Whalen
Enormously important. China particularly, they are still shrinking. In terms of population, and it’s going to really hamstring them for years to come. The one-child policy was a bad idea. It was political in nature. And now that they’ve seen the result, though, I think they’re a little bit chastened by the experience.
Monetary Metals
Last rapid-fire question for you is going to be about our friend Kevin Warsh. He’s taking this mantle at the Fed. What do you think is going to be the— looking back, the most beneficial change that Kevin Warsh makes? And what do you think is the mistake that he’s most likely going to face during his tenure?
Chris Whalen
The Fed is the most important New Deal organization in America. The changes that Franklin Roosevelt and Marriner Eccles made in 1935 essentially turned the central bank into a Washington-based version of Gosplan, the Soviet central planning agency. And I think Kevin Warsh wants to wind the clock back, focus them on monetary policy, get them out of the economic prognostication game.
I also think he’s going to change a lot of the internal processes, people, models, the whole shebang, because the Fed has used a lot of, I think, inaccurate and at times dangerous models, for example, to predict the level of reserves. That’s required for the US markets. And they’ve been proven wrong again and again, but they’re not very good at admitting it. So I think Warsh is going to be a breath of fresh air. He’s going to take the Fed back more to where it was before 1935.
I wrote a long article about this for International Economy Magazine that’s available online, but, uh, I expect good things from Kevin. He’s a great guy. I’ve known him for many years.
Monetary Metals
All right, Chris, last question I ask all my guests. What’s a question I should be asking all future guests of the Gold Exchange Podcast?
Chris Whalen
How much gold do you own?
Monetary Metals
Well, that’s a good one. I don’t know if they’ll answer it, but Chris, it’s been fascinating getting to interview you. Where can people find more of your work?
Chris Whalen
I appreciate the opportunity, Ben. I publish the Institutional Risk Analyst newsletter. I also write a column for National Mortgage News, which is a lot of fun if you are into housing. And I’m very active on X and LinkedIn under R.C. Whalen. So we’re always happy to hear questions and comments from our viewers.
Monetary Metals
Chris, as always, it’s been a pleasure getting to interview you. We’ll have to have you back on again soon.
Chris Whalen
We will do it then.
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