MacroVoices #374 Chris Whalen: Are More Banks Going To Fail?
Chris Whalen discusses the ongoing banking crisis, comparing the current situation to the 1980s when Paul Volcker's rate hikes left banks underwater with low-yield assets. He argues the Fed has created similar conditions today, warning of more bank failures unless they provide financing solutions for underwater securities.
Summary
Chris Whalen provides an in-depth analysis of the current banking crisis following the failures of Silicon Valley Bank and First Republic Bank. He argues this situation mirrors the 1980s when Paul Volcker's aggressive rate hikes left financial institutions underwater on their assets. Whalen explains that approximately $25-30 trillion in assets created during 2020-21 carry very low coupons (average mortgage around 3%), while current rates are much higher, creating massive mark-to-market losses. He emphasizes this is primarily a cash flow problem rather than just a mark-to-market issue. The Fed's rapid 600 basis point rate increase over 18 months has created unprecedented pressure on banks holding low-yield securities. Whalen warns that without creative Fed intervention - such as allowing banks to repo underwater assets at their coupon rates rather than market rates - more bank failures are inevitable. He discusses the vulnerability of commercial real estate due to permanent shifts in work-from-home patterns post-COVID, predicting significant losses similar to the 1970s Texas oil restructuring. On inflation, Whalen argues it's embedded in the system and much higher than official statistics suggest, with the Fed terrified of deflation particularly in housing. He believes the Fed will eventually be forced to cut rates but doesn't expect a return to 2% inflation. Regarding investment opportunities, he owns select banks like Western Alliance and mortgage companies like Guild Holdings, viewing current weakness as buying opportunities in fundamentally sound but oversold companies.
About this episode
MacroVoices Erik Townsend and Patrick Ceresna welcome Whalen Global Advisors founder Chris Whalen to the show to discuss the formative banking crisis, what’s driving it, and what comes next. They also touch on the outlooks for stocks and precious metals. https://bit.ly/414Qj5S The Institutional Risk Analyst: https://www.theinstitutionalriskanalyst.com/ Download Big Picture Trading chartbook 📈📉 https://bit.ly/4170abB ✅Sign up for a FREE 14-day trial at Big Picture Trading: https://bit.ly/2JjZR7J Check out Nick's YouTube channel: https://www.youtube.com/c/Optionfinity Join OptionFinity discord: https://discord.gg/Rvnsv6Y Please visit our website https://www.macrovoices.com to register your free account to gain access to supporting materials
Key Insights
- Whalen argues the current banking crisis parallels the 1980s when Paul Volcker raised rates above the banking system, leaving institutions underwater on their assets
- He claims $25-30 trillion in assets created during 2020-21 have very low coupons (average mortgage around 3%), creating massive cash flow problems for banks at current rates
- Whalen warns that without Fed intervention allowing banks to finance underwater assets at coupon rates rather than market rates, more bank failures are inevitable
- He predicts significant losses in commercial real estate due to permanent work-from-home shifts, comparing it to the 1970s Texas oil restructuring crisis
- Whalen argues inflation is embedded in the system and much higher than official statistics suggest, with the Fed biased toward tolerating higher inflation to avoid deflation
- He believes the Fed's 600 basis point rate increase in 18 months has created unprecedented market distortions that the central bank must now address creatively
- Whalen contends that mortgage holders with sub-3% rates will stay in place, creating a fundamental shift in housing market dynamics for years
- He argues the real effective borrowing rate for businesses is now 7-8%, which will slow the economy significantly and force the Fed to eventually cut rates
Topics
Transcript
Thank you. Eric Townsend and Patrick Ceresna. Macrovoices episode 374 was produced on May 4th, 2023. I'm Eric Townsend. This episode of Macrovoices was made possible by Respect Energy, a leading European trader of renewable energy and a one-stop shop for all green energy investors. Whalen Global Advisors founder Chris Whalen returns as this week's feature interview guest. We'll discuss the formative banking crisis, what's driving it, and what comes next. We'll also touch on the outlooks for stocks and precious metals. Continuing to remain weak, trading along its 52-week lows, the June WTI crude oil contract was down 7.7%, closing at 68.60, but the drop has been relentless as we have seen a peak-to-trough drop of $20 since the…
Full transcript available for MurmurCast members
Sign Up to AccessMore from Macro Voices
MacroVoices #554 Yasir Arafat: Mass Manufacturing Nuclear Power Plants
Yasser Arafat, CTO of Allo Atomics, discusses the company's plans to mass-produce advanced nuclear reactors at scale, arguing that cost-competitive nuclear energy (cheaper than coal and gas) could be achieved within years, not decades, by leveraging manufacturing principles similar to Tesla's approach. He addresses fuel supply chain constraints, nuclear waste recycling potential, and competitive threats from China while outlining a pathway to transition global energy systems away from fossil fuels.
MacroVoices #553 Brent Johnson: Disparate Housewives
Brent Johnson discusses the dollar's breakout above 102, analyzing why the greenback continues strengthening despite expectations for decline, while also exploring the deepening coordination between the Federal Reserve and Treasury Department in what he calls the "Disparate Housewives" framework. He argues the US remains positioned to weather higher rates better than other economies, and frames the current geopolitical environment as analogous to the early Cold War era with China rather than a replay of the 1970s.
MacroVoices #552 David Rosenberg: Navigating The Noise
David Rosenberg argues that inflation concerns are overblown despite recent energy price spikes, contending that without wage pressures entering the labor market, price shocks will remain transitory. He identifies the November 3rd midterm elections and November 4th Treasury refunding announcement as pivotal catalysts that could trigger significant bond market rallies and economic slowdown as fiscal stimulus ends and gridlock returns.
MacroVoices #551 Michael Every: Decoding The Global Geopolitical Puzzle (Part 2)
Michael Every from Rabobank discusses the interconnected geopolitical tensions between the U.S. and China, analyzing how conflicts in Ukraine, the Middle East, and potential Taiwan invasion scenarios serve as strategic moves in a broader great power competition. He examines emerging policy shifts including potential diesel export bans, AI arms races, and nuclear escalation risks while arguing that national security concerns are overriding traditional free market economics.
MacroVoices #551 Michael Every: Decoding The Global Geopolitical Puzzle
Michael Every of Rabobank discusses interconnected geopolitical crises spanning Iran, Ukraine, and the Middle East, arguing that oil prices don't reflect true disruption risks and that energy will increasingly become a tool of statecraft. The conversation covers potential diesel shortages, U.S. policy responses, the Greenland-Denmark security deal, and China's strategic positioning amid global instability.