Chris Whalen: Bonds, Gold, Energy, & the Coming Food Shock

0:00 You know, the only institution that can really manipulate the market is the Fed, but I don't think that's particularly helpful either. We have to address the core issue, which is the budget deficit, the credibility of our government, and the silly statements that keep coming out of Washington. Those are the reasons that we have higher interest rates, to be honest with you. >> Hey everyone, welcome back to another episode of The Wrap with Chris Whalen, where we break down what's happening on Wall Street, Washington, D.C., and everywhere in between. Chris, great to see you. >> Hello, Julia. >> Wow, what a week it's been, Chris. I feel like there's so much to dig into,

0:46 and before we get into it, I got to give a shoutout to our partners over at Monetary Metals. You can head over to monetary-metals.com/thewrap to learn more, and we appreciate their support in making this possible. >> Yes, we do. I've been going back and forth with Keith Weiner, the uh founder of Monetary Metals, on X. We have a lot of fun. >> Love it. I love it. All right, I mentioned there's a lot to get into. Where to even start? I think I want to start with um what's going on in the bond market with yields, because we had the 30-year Treasury print its highest yield since 2004. We had the 10s go through 5%. So, question for you, Chris. >> Yeah. >> Is this just an air pocket, or is the market telling us long rates have

1:33 structurally reset? >> I think it's the latter, Julia. I think uh the rise in long-term interest rates is about the credibility of the United States, and also the noise that's coming from the Trump administration. A lot of what President Trump and Secretary of Treasury Scott Bessent have to say about interest rates and policy generally doesn't make a lot of sense, and I this kind of scares people. So, the reality is it has nothing to do with the Fed. The Fed is, as I said on X yesterday, reduncil. That's a Frank Zappa term, by the way. Uh and, you know, what are we going to do? I I don't I don't know how to make these people be quiet, uh but I don't think they're being helpful right now. >> And obviously this has dominated the

2:20 conversation. One of the areas that a lot of folks are talking about, and this is a great area for you, Chris, is um mortgage rates above 7%. New normal? >> Yeah, they this is the new normal. They've been above seven for a while. Um people track the averages that are reported by Fannie Mae and Freddie Mac, uh but the reality is you could take basically the uh 10-year Treasury and add two points, and that kind of tells you where mortgage rates are because lenders have to try and recover their fees when they sell that loan into a security. They're usually down on cash when they close your mortgage, so they try and recoup some of that, and then they get the rest of their money back with the servicing fees every month. So, you know, we're

3:07 kind of there, depending on your credit score and other factors, but if you're doing an 80% loan, 20% down, yeah, we're well over 7%. >> So, how do you think that one's ultimately going to affect like just more of the market dynamics for housing? >> People are going to have to get used to the fact that we're back to where mortgage rates were 15, 20 years ago. Uh we had a period from the Great Financial Crisis until COVID, you know, a couple years after COVID, when the Fed was heavily subsidizing the market. Uh quantitative easing was not just about rescuing the Treasury market, which was the primary reason that they did it, but it was also a subsidy for housing. Because when you're buying

3:52 uh long-term Treasury securities and you're forcing yields down, again, that's how we price mortgages. So, it was an effective subsidy for the industry. And I think you're going to see a lot of structural changes. You're going to see a lot of consolidation in the industry. We've already seen it, but we're going to see more. Um you're going to see head count going down in the industry. I'll be attending the MBA annual in Chicago in a few weeks. That's going to be a an interesting meeting, but I think it's also going to be sad because a lot of people are going to be exiting the mortgage industry. >> Yeah, so all the painful for sure. Yeah, we're interested to get your takeaways in those conversations um when you head to that meeting in just a few weeks. Um last week we did have the Fed hike 25 basis points. I know you called it lame

4:39 at the time. Um >> Yeah. >> Gosh, it feels like so much longer >> Julia. That's all they're doing. I don't think they're having any real impact on things. >> Do you think um because even with the hike the long end sold off anyway, so do you think worse has already lost um the 10-year and the 30-year at this point? >> I think so. Unless the Fed is willing to come in and start directly purchasing securities in size, uh there's not much they can do. The Treasury repurchases are way too small to be significant. And you've also had people calling for Fannie Mae and Freddie Mac to come in and buy uh mortgage securities. But that doesn't really help because they have to hedge their book. If they don't hedge, then they could easily get

5:25 wiped out. They don't have a lot of capital. So, you know, the only institution that can really manipulate the market is the Fed, but I don't think that's particularly helpful either. We have to address the core issue, which is the budget deficit, the credibility of our government, and the silly statements that keep coming out of Washington. Those are to reasons that we have higher interest rates, to be honest with you. >> They should probably read Inflated. I feel like now is probably a really good time to go read Inflated. That You have the latest edition. >> I gave my talk at the University Club. I'm going to be posting my comments up on the website for my premium subscribers. And yeah, we sold a lot of books. We had over 60 people show up for a a fairly you know, boring lecture, but it was a

6:10 lot of fun. We had great questions and I'm really grateful to my friends for setting up that event. >> Chris, if if I know you, I know it's not boring. I've seen you hold court at the University Club Not the University Club. What's the club again? Were you at the University Club? Where were you for this event? >> Uh no, we were somewhere else. I can't remember where it was, but it's kind of a blur. I've been at University twice. It's a great institution. >> Yeah. Okay, any any stand out questions? Like what what was top of mind for folks? >> They were asking the basic questions about the role of the dollar in the world, what's going to happen in that process. And my answer is very simple. We're going back to something that looks like the period before World War I where countries had to compete in

6:56 terms of the value of their money. And we're going to have gold as the foundation of the entire system. This is the significance of what China has been doing that we talked about in that interview with David Kotok a few weeks ago. Is they have embraced the gold instead of trying to pretend it's not there. Americans have been brainwashed for the past 100 years to think that gold is no longer significant, but guess what? When people sell Treasury securities, they're buying gold. When and they're doing so by spending fiat currency. So, you're not going to get away from currencies that are not explicitly backed with metal, but I think you're going to see countries holding their reserves in gold instead of dollars. >> Gold has been one of the best performing

7:42 major assets of the past few years, but if you've been watching markets lately, you know it hasn't always been a straight line. But one thing that hasn't changed, investors around the world continue to view gold as an important portfolio asset amid persistent fiscal deficits, rising government spending, and continued central bank buying. Price appreciation isn't the only way to benefit from owning gold. What if your gold didn't just sit in a vault, but actually generated more gold? With Monetary Metals, you can earn a yield on your gold paid in physical gold without selling your metal. Instead of relying solely on changes in the gold price, you have the opportunity to increase the number of ounces you own over time. That means you're not just hoping the price goes up. You can potentially grow your gold holdings while continuing to

8:28 participate in any future price appreciation. It's a fundamentally different way to think about owning gold. Instead of being a passive store value, your gold can become a productive asset. If you'd like to learn more how to make your gold more productive, head to monetary-metals.com/thewrap. Okay, this is interesting because I've had a number of folks write in the comment section that rising yields usually put pressure on gold. So, do you think we might be seeing a different story ultimately play out, maybe one that's more on the fiscal side? >> No, past the week or so, you've seen gold prices come off a little bit, not

9:14 much, and that's in response to the fact that you see higher yields. That's usually the reflexive short-term reaction when interest rates go up because people are chasing yield. Most people live in the fiat world. They don't go out and buy gold for long-term. However, if you look at the structural changes in the market with global central banks, the Chinese, the Russians, all the rest of it. It's very clear that people are allocating their money to gold instead of dollars. And that to me is the medium to long-term trade. That's why I'm still very long gold and silver. >> Can you re-emphasize like the bigger thesis on the dollar, gold, and more of the I guess the bigger kind of like the the setup, the the the

10:00 fiscal backdrop if you will, and more of the bigger picture thesis you have going forward. Because as you mentioned, kind of like going back to like pre-World War I, can you just elaborate a bit more, Chris? >> Well, everybody watching this needs to go out and buy a copy of Inflated >> Yes, and we will link it. We will link it. Yeah. >> And I I think that'll give you a perspective on how we got here. That's why I wrote the book. But I think, like I said, we're going back to a multilateral currency world instead of a world that was entirely dominated by the dollar. Now, is the dollar going to stop being the primary means of exchange in the in global trade, buying oil and commodities and things like that? No. People are going to keep using the dollar, but they're not going to use it

10:47 as a store of value because they see the the budget deficit. And they know that long-term the dollar is going to lose value. Now, what's interesting is over the past month or so, the dollar's actually rallied. People have been running into dollars because interest rates are rising, and you see a short-term trade developing here. But it's very clear that if you look at the top 20 central banks around the world, they're holding less dollar securities. So, that's kind of the tension. You'll get short-term bounces in the dollar despite what we hear from Washington. Uh you know, look at the President Trump's speech to the UN, which was barely covered by the media, but it had some pretty crazy stuff in it. He was threatening to annihilate Iran and and a variety of other things. And I think

11:32 that that kind of activity, that kind of those kinds of statements are really injurious to the dollar long-term. So, you have to kind of balance the the short-term reflexive market reactions with where the market's going medium to long-term. >> Mhm. Yeah, that's a really good point. Like balancing the short-term with that long-term uh thinking as well. >> you watch it day-to-day, you're going to go crazy. >> Oh my gosh. You'll be here wrong. No, it's Yeah, you have to think uh Yeah, it's probably hard for people to hold those two things in their mind at once as well. Um Okay, so if Worsche keeps hiking, do you I mean, do you do you expect a hike in October? Are you in that camp? >> I think people are are saying that he almost has to. And again, I think it's

12:18 about the credibility of the Fed more than fighting inflation. There isn't much a global central bank can do to fight inflation right now because it's coming from structural issues like destroying most of the refining uh refinery capacity in the Persian Gulf. Uh we just did a another conversation with John Dizard. It's up on the website. I urge people to read it. And what he's telling us is that the lack of refined product, not oil. There's plenty of oil, right? The problem is is that oil is a very diverse commodity. It's almost impossible to generalize about oil. You can run certain kinds of oil through a refinery and others not. So, when the Saudis, for example, told the Europeans that they couldn't ship oil because the Houthis had uh taken a city on the Red Sea and

13:06 were in a position to block all of their exports, they're not letting Saudi ships go through the Suez Canal now. So, what that means is that the Europeans have to find another source of oil, which is very difficult, that they can actually run through their refineries to make oil, to make heating oil, that sort of thing. Well, that's very hard and it takes a long time to build new refinery capacity. I asked John about this. I said, are people going to build refineries somewhere else? No. So, what we need to get is at least a truce with the Iranians, which I think is going to be very difficult. Uh and that way all of the parties involved can start to repair these facilities and be able to meet global demand. Right now, you know, we're in a lot of trouble, Julia. I'll

13:51 give you an example. California shut down all their refineries, and they were buying uh refined product from the Chinese and the Koreans. Uh the Chinese may not be selling them uh diesel fuel. That's a problem. >> So, it's interesting. Um We guys were talking about like the lubricants. Um >> Yes. >> Sulfur, which is incredibly important. And it sounds like this is not just like an energy story, but over time it can like spill over into a grocery store story next year. Is that the case? Like Yeah. You know, can you elaborate like >> pieces to that. You have transport, which is diesel fuel, right? Just about everything you buy in a grocery store comes by truck.

14:37 >> Mhm. >> So, right off the bat, the cost of diesel is key. The other thing is that one of the key outputs from the refining process, especially if you have heavy uh sour crude that has a lot of sulfur in it, is they use that sulfur to make fertilizer. Roughly half the sulfur produced in the world ends up going into fertilizer for the farm. Now, fertilizer prices have gone up eight times over the past 12 months. They're way too expensive for most farmers. What are they going to do? The farmers are just not going to use fertilizer. And that means that their yields are going to fall. John estimated that something like a third of fertilizer usage this year is not going to be there next year. So, we could see an enormous decrease in yields in the

15:24 US, in in Russia and Ukraine, rest of the world, and that's going to mean higher food prices. Farmers who have to pay more for diesel for their tractors are going to have to try and figure out a way to make more money, which means they'll raise prices for their products. >> I mean, Chris, like stocks already all it's already so expensive. Like, if you go to the grocery store, you know your bill's meaningfully higher than just 5 years ago. I mean, it's already higher. >> into the cake, Julia. There's nothing we can do about this. >> It's baked in the cake, but it hasn't shown up fully yet, right? >> That is correct. So, our prognostications about double-digit inflation, unfortunately, are going to be proven right. I I can't tell you how sorry I am to say that, but it's going to be very painful, and it's

16:10 going to have huge political repercussions in this country and in Europe. In Europe, they don't have enough gas and heating oil for the winter. Uh think about that. If they have another cold winter in Europe, uh you're going to have severe political repercussions. You're already seeing it in Germany. Uh the mainstream party lost heavily in Berlin and in a couple of other elections last week. You're going to see more of that. >> What do you think, um based on your conversation with John, who's like very deep in this space? What do you guys think is the end game here? >> The end game is that the United States has to admit that they have not defeated Iran in this war. Iran is demanding control of the Strait of Hormuz, which I think is a really bad idea, but there

16:57 are precedents. If you look at uh history, you see that the Turks controlled the Dardanelles. That was one of the uh a results that came out of World War I. They get paid a toll for traffic that goes through the strait. So, the Iranians are trying to assert similar rights. Uh free passage is a very important concept around the world, and if we start having nations tolling significant choke points in the ocean, and there are many of them, uh I think that's going to be a problem. It's going to be an added cost for global trade. It implies a setback or a a a rollback of freedom of the seas. So, I I think the US is going to resist this and other nations, too, especially the Gulf nations. But, how else do we get at

17:45 least a functional truce that allows people to spend the billions of dollars that we have to spend to rebuild these facilities gas oil refining, all of the above? You know, the the Persian Gulf countries were supplying something like half of the refined products for the world because they were the price leader. So, I think that, you know, if if we can't replace these facilities, and we can't, it's just prohibitively expensive, uh then we have to figure out a way to stop the hostilities and get the world focused again on on repairing this capacity, which will take years, by the way. >> Is there a level like maybe a price level at which it become like where it kind of breaks or

18:30 >> Oh, yeah. >> People freak out and inflate >> destruction here, Julia. When prices get to a certain point, the driver of that semi or the farmer is just going to park their equipment because they know it makes no sense for them to produce or to work. That's to me the big uh threat. If we start seeing significant demand destruction in this country, and I think that's a possibility end of this year going into 2027, then you're going to see the Fed cutting interest rates. I put that prediction up on X yesterday, and you know, I got quite a a lot of responses. Uh and the reason is is that if you see uh uh economic activity weakening, what else are you going to do? Is the Fed

19:15 going to keep raising interest rates? Of course not. You know, the monetary policy thought process that we've had in this country for 50 years, going back to Humphrey Hawkins, is not really geared for this kind of an environment. Most of the time when you have a war, the central banks tend to keep interest rates low and and be helpful in terms of financing. That's certainly the case in World War II. >> Yeah, I mean, well, talk about a precarious position. Um >> Yeah. >> Re-state that one real quick, though, Sue, how we could get to a rate cut when you reach a certain level with the the prices the energy prices >> enough, you start destroying demand. When people can't afford food, when they can't afford gasoline to drive,

20:01 uh say in in terms of discretionary consumption as opposed to essential consumption, then the economy is going to slow. You're going to see people getting laid off. And at that point, the employment imperative that the Fed has in their dual mandate is going to be at the top of the list. They're not going to be worried about inflation every more anymore. I also think, and you and I have talked about this, that when you're running a deficit of $2 trillion, uh talking about getting back to the 2% inflation target is kind of silly. It It's really not a credible position. But all the economists out there that I, you know, follow, they've been calling for the Fed to raise interest rates because that's how they think about the world. I think they have to shift their thought process a little bit and start to look

20:49 around them uh and be a little more sensitive to what's going on in in our market and the global market because, really, I'm worried about demand. I'm worried about people keeping their jobs. >> It's like the old playbook doesn't work cuz you know, it's just a different setup now. >> Yep. >> Yeah. I'm telling you, there's a psychology though to filling up like um we're now at a my husband filled up the other day um it was like 100 bucks just to fill up the tank and I'm like, "Wow, that it's not that was not the case just a few years ago." So. >> Oh, yeah. And we have two little cars and they're 50, you know, if the tank's empty. >> Yeah. Yeah, certainly. Okay, we have a number of viewer questions today. Um always keep those coming guys. All right, Chris, I'm going to start with

21:35 the Robert's question because Annaly is always a very popular topic and Robert wants to know if he sold any Annaly. >> Uh I have actually been rebalancing my portfolio. I do this every quarter. I have liquidated about a third of my positions. Annaly was 16% uh at the start of last quarter. It's down to 11 and I took the proceeds, they were profitable, uh and I've been putting them into energy stocks. I'm looking at some of the drillers. I'm looking at the majors because unfortunately, I think energy is going to be doing pretty well. It may start to attract political attention as a result, but unfortunately, the energy trade I think is going to be really at the top of the list for next couple years.

22:21 And there is some other things. I got rid of SpaceX. Um there were two or three others. I got out of Schwab. I had made about 11% on our Schwab position. Banks are going nowhere this year. So, you know, the premium subscribers saw on the blog get to see my portfolio. In fact, we're going to publish it next week once I'm done with the rebalancing. >> And by the way, folks, we do we'll link to Chris's Institutional Risk Analyst and there is a special discount for viewers of The Rap. >> are going up on October 1st. We're rebalancing that, too. Inflation, I know. >> Oh gosh, yeah. Um but you also do like quarterly calls and stuff. It's pretty cool. Um and I've noticed the traffic has just been on fire over there at the rap. I love

23:07 seeing like the view counts. So, that's exciting too. Um okay. So, you repositioned a bit. Energy is one of those trades that's been in the circle >> don't dislike Annaly. I'm not worried about where we are in in terms of interest rates cuz these guys know how to trade spreads. Initially, you know, going back to what we said about the dollar, rates were going up but spreads were coming in. And now what you're seeing is that spreads are widening, which is actually good for the REITs that invest in mortgage-backed securities. >> All right. I don't know if this really applies to you. You can correct me if it if it if it doesn't. Justin wants to know if you have any shorts. >> Not right now. Occasionally, I will buy puts. That's about all I will do on the short side because, you know, I don't

23:52 buy stocks where I have any kind of consulting relationship with the company. So, you notice I typically don't own mortgage stocks. Um I don't have a relationship with Annaly, in case you're wondering, even though I know them all. Um and I, you know, to to run a short strategy, you have to sit in front of the computer all day. That's what it comes down to. So, I tend not to go naked short unless I really, really have a a conviction on the stock. >> Yeah. All right. This comes from viewer Louise, and this is in reference to last week's episode when we were talking about Congress needs someone just to oversee them. So, that he wants to know, Chris, are you talking about a financial oversight management board for the US

24:39 just like we have for Puerto Rico? >> It's a very good question. I love that question. Um you know, the answer is yes. I think that Congress's first job is the power of the purse. If you look at our Constitution, that's clearly their their chief job, and they don't do it. They'd rather run around issuing press releases and and do anything else except focus on the budget. But, I do think that the deficit is going to force us to come up with another way of prioritizing spending. One of the questions I got at the University Club last week was, "What do we do?" And I said, "It's very simple. We need to cut the budget deficit in half every year." And how do you do that? You look at everything. You start with military spending. You start even

25:26 with entitlements. And you have to go down the list and say, "What is important?" I actually think eventually we're going to means test Social Security. Because Social Security has never been sound on an actuarial basis. You know, when FDR put that into place, we had 30 or 40 workers for every retiree. Now, we're the other way around. And it's invested in Treasury debt. So, there's nothing in the shoebox. There is no savings. The Treasury has to liquidate those assets in order to pay out cash. If they'd invested in the stock market, that would have been different. And the Social Security Trust Fund actually would be fine. But, because it was a pay-as-you-go system, and there was no real savings in it, you got to look at it. And nobody wants to hear this. You

26:13 know, everybody wants what they want, right? But, in our society, unfortunately, and this is what we wrote about inflation, Americans want to take more out of the system than they put in. And that doesn't work. >> Yeah. You know, um that reminds me it was probably about a decade ago, um Stan Druckenmiller, he's talked about like the Social Security and mean test. You know, I have to go back and look. He gave a presentation on it, but he was like, "It's basically like intergenerational theft." And he's like, "Why are people like me getting Social Security checks or will get one?" Or like >> Yeah. >> Like the Warren Buffett, even though you can I know you don't have to cash it or whatever, but uh yeah. >> Well, look, you pay into the system, but I think we have to accept the fact that our safety net is really kind of

26:59 unreasonable. If you look at most other countries, the social safety net that they have is for the end of your life. It's very minimal. Look at Germany, which is where social safety nets were actually created. I think we have to go back to taking care of those who can't take care of themselves first. And people who have the opportunity to accumulate wealth, you know, should we be supporting them with social security checks? No. So, the way I look at social security is that's just part of the tax burden. If we really look at it in an honest way, you know, that's what it is. And you know, I I think for the elderly, for people who are disabled, we got to take care of them. That's what it comes down to. >> Yeah, you that would it's just too sad

27:44 like have like a total crisis in those retirement years. How about um in that like the way that it's invested? Treasuries? Like what Why not actually invest in like you know, the like in America rather like in the stock market? >> Well, because the ethos in the old days coming out of the New Deal and World War II was that the federal government would do everything and anything for us. And the obligations of the United States were money good. So, if you didn't have all of this federal debt, which is absolutely absurd, you know, the Congress has totally abdicated their responsibilities to the country by allowing these deficits to run this way, you would be okay. You could have a pay-as-you-go system. But when you have

28:30 $40 trillion worth of debt, Julia, and you have to pay interest on those securities to avoid default, it becomes very hard for the Treasury to have the Social Security Trust Fund and other trust funds where they have received cash, but then the cash goes back out the door. If you look online in the congressional record, you'll see a wonderful set of discussions with Daniel Patrick Moynihan and my old boss, Fritz Hollings, the senator from South Carolina, talking about this. And it used to be discussed a lot. Nobody talks about it now because nobody wants to talk about anything having to do with the fiscal deficit. >> This next question comes from Raymond. You often speak about a housing correction, but with the Treasury

29:17 flooding the market with paper and inflation rising, an asset price correction seems counterintuitive. What makes you so sure that housing prices will fall? >> I think what you can see, Julius, that housing prices are falling in a lot of the market, but in some parts of the market, like New York, for example, where you don't have adequate supply, housing prices are going up. So, I think it's a great question. My friend Logan Mohtashami, who's a veteran mortgage broker in Southern California, has been talking about this, and he's absolutely right. You are going to see parts of the country, especially in cities, where you have limited supply, where housing prices are going to keep going up. Rental prices are going to keep going up. But other parts of the country where you've had a lot of construction and you have an imbalance

30:04 between supply and demand, they're going to correct. Down here in Florida, anything between the interstates is correcting right now. Look at Orlando. You had prices get up to close to a million dollars for entry-level homes, and now they're back down to 3-400,000. So, that's a pretty significant correction. >> All right, final question comes from Rob. We've had a lot of folks who want to know about this, but it says, "Please ask Chris his opinion about private credit and LTC policies." And I'll note that Rob says he had one with Genworth for the past 15 years, and they're concerned about their affiliation with Apollo and that their own past history is this a policy that is at risk to pay out? I don't know what you can answer there but >> No, the answer is yes. Um you have to

30:50 look at the carrier that issued your annuity very carefully or you could have a life insurance policy. Um usually when insurance companies get into trouble, it's because they invest in assets that are not ideal for funding the annuity or life policy. Life insurance companies typically will go out and buy stocks, they'll buy high-grade bonds, corporate bonds, but more recently you've seen the Apollos and the rest of them, Guggenheim, uh putting different sorts of assets into these companies, and that can be a big problem. >> All right. Chris Whalen, chairman of Whalen Global Advisors, author of the Institutional Risk Analyst Blog, the star of The Rap with Chris Whalen.

31:35 Thank you so much, and I want to thank our partners over at Monetary Metals. You can head over to monetary-metals.com/thewrap. And that's a wrap, everyone. >> Thank you, Julia.