#419 Chris Whalen: Mortgage Funeral, No Bond Rally & the Deficit Washington Won’t Talk About

Oracle

Across the shows: 4 speakers in other episodes, 0 bullish and 3 bearish calls, past 30 days

• Chris Whalen · Whalen Global Advisors LLCBearish

  Oracle's data-center buildout is faltering, with notices of default from power shortages.

  Whalen cites Oracle issuing essentially notices of default because it cannot get electricity for data centers it has been building. He links this to the broader AI spending boom, which he sees as overdone and circular, with vast spending but little real revenue to justify it.

  “Oracle has already had to, you know, issue essentially notices of default because they can't get electricity for some of the data centers they've been building.”at 22:18

loanDepot

• Chris Whalen · Whalen Global Advisors LLCBearish

  loanDepot is the industry's cheapest stock, yet institutions avoid it and it sits near 52-week lows.

  Institutional investors are not interested in mortgage names. Whalen notes that if they expected rates to bounce, people would be buying loanDepot, the lowest-priced stock in the industry. They are not, and most mortgage stocks are near their 52-week lows, so Whalen sees no buying case.

  “if if we actually thought there was gonna be a bounce in interest rates, people would be out buying loan depot, which is the lowest priced stock in the in the industry, but they're not doing it.”at 27:53

Exxon Mobil

• Chris Whalen · Whalen Global Advisors LLCBullish

  Exxon is pricey but can go higher, since energy demand will keep rising.

  Whalen owns Exxon. He says energy stocks like Exxon, Chevron and Valero were re-rated a few months ago and are expensive, but they could still go higher because energy demand will continue. Progressive solar and wind policies may have to be set aside at least in the short term, as California and others need refined product that now must be made locally.

  “I own Exxon.”at 33:53

The Williams Companies

• Chris Whalen · Whalen Global Advisors LLCBullish

  Williams is a pricey natural gas pipeline stock that can still go higher on energy demand.

  Whalen owns Williams, a natural gas pipeline company. Like the other energy names he holds, it is pricey, but it could go higher because there will be continued need for energy.

  “I also own Williams, which is a pipeline company for natural gas. And all of them are pretty pricey, but they could go higher simply because there's gonna be a continued need for energy.”at 33:55

Chevron

• Chris Whalen · Whalen Global Advisors LLCBullish

  Chevron is pricey but can rise further, since energy demand will keep rising.

  Whalen owns Chevron. He says Wall Street already re-rated energy names like Chevron, Exxon and Valero a few months ago, and they are all pretty pricey. They could still go higher because of continued energy need, and solar and wind policy may be set aside for the short term as refined product becomes scarcer.

  “I own Chevron.”at 33:55

US housing

• Chris Whalen · Whalen Global Advisors LLC

  Inflation will dampen new home construction, since builders face high rates, materials and labor costs.

  Replacement cost on Whalen's house is about $1.4 million versus roughly $1 million for comparable existing homes, so building new is far more expensive than buying. Rates, materials and labor all raise costs, making speculative spec building risky. Large public homebuilders have already pulled back incentives and stopped buying down loans by two or three points, which they had done to clear inventory. Builders will have to be careful.

  “So I think that inflation is gonna put a damper on new home construction. No question.”at 11:44

• Chris Whalen · Whalen Global Advisors LLC

  US home prices stay a seller's market in many places, with inflation supporting prices.

  Housing is local, but many markets remain sellers' markets. Markets that fell earlier this year, like Central Florida, have bounced back because of demand and inflation, and rising rents push people to pay more for housing. Inflation also raises replacement costs and makes new supply expensive, which supports prices of existing homes. Price resets are possible only where oversupply exists. Coastal California and the Northeast are especially constrained, with expensive land and building costs.

  “I think it's gonna continue to be a seller's market in many places.”at 12:32

• Chris Whalen · Whalen Global Advisors LLC

  Mortgage industry faces a funeral: heavy downsizing, consolidation and firm closures ahead.

  Mortgage industry headcount rose almost 50% during COVID and must now shrink well beyond that. Plain-vanilla purchase-mortgage volume is thin, so firms are closing or pivoting to business-purpose rental loans and ITIN loans. Volumes and profitability are down sharply, lenders and vendors are cutting back, and attrition on Whalen's 25,000-person mortgage mailing list is considerable. Few financings have gotten done, and institutions have little interest in mortgages.

  “The industry is gonna have to continue downsizing rather dramatically.”at 26:19

• Chris Whalen · Whalen Global Advisors LLC

  The Fed won't return to buying mortgage bonds; that experiment was a bad one for it.

  The Fed has bought mortgage bonds since Ben Bernanke to subsidize housing, but that era is ending. Whalen doubts Kevin Warsh would restart mortgage-bond buying. If anything, the Fed may buy Treasuries again, but he expects no return to mortgage-bond purchases because the last experience was very bad for the Fed.

  “I don't think you're gonna see the fed buying mortgage bonds. It was a very bad experience for them.”at 30:19

US deficit & government debt

• Chris Whalen · Whalen Global Advisors LLC

  The federal deficit is the biggest driver of higher long-term Treasury yields.

  Washington is window-dressing the deficit. Treasury should have bought back low-coupon COVID-era debt, which has long duration, and issued current coupons instead. That would reduce volatility but raise interest expense, so officials avoid it. Nobody in this political season wants to talk about the budget, and Whalen judges the deficit the single biggest factor pushing long yields higher.

  “And Washington is trying to window dress the budget deficit... And yet I think that is the single biggest factor that's been pushing long term yields higher.”at 17:03

• Chris Whalen · Whalen Global Advisors LLC

  US debt is unsustainable and a bond restructuring is likely eventually, though the US is not yet at crisis.

  Several French companies now have higher credit ratings than France's government, and Microsoft and Johnson & Johnson have higher ratings than the US government. Using Minsky's framework, the US is in the Ponzi phase, where governments can only roll over debt. Bond investors know the arithmetic and expect eventual restructuring, so they move money into gold, commodities and real estate. The US is far from Greece or Weimar-style collapse because it is a productive society that can fix the problem.

  “And you're starting to see that in The US too. Microsoft, Johnson and Johnson, all have higher credit ratings in The United States. That's where we're headed.”at 19:11

US elections & politics

• Chris Whalen · Whalen Global Advisors LLC

  Democrats likely win a chamber, bringing investigations of Trump's circle that hurt markets.

  Whalen expects Democrats to take at least one or both houses of Congress after the midterms. That would bring two years of investigations into Trump, his cabinet, family and associates, which he calls a negative for the investment world at best. After four years of a pro-business, deregulatory White House, a return to Biden-era attempts to regulate everything would be very negative for markets. Markets did fine under Biden himself.

  “the Democrats will probably take at least one or both houses of congress. We will spend the next two years with an inquisition focused on mister Trump and all of his cabinet members and family and friends.”at 3:06

US consumer

• Chris Whalen · Whalen Global Advisors LLC

  Consumers are trading down and seeking deals, with lower volumes across consumer companies into Q3.

  Adam Josephson's consumer-products earnings coverage has repeatedly flagged lower volumes since the end of Q2, with consumers hunting for deals and anything that relieves price pressure. Whalen expects that theme to dominate into the third quarter, making affordability the central consumer issue.

  “If you read his work, every single earnings report that he's written up going back to the end of the second quarter has talked about lower volumes, a more difficult environment in terms of consumers are looking for deals.”at 4:12

Commercial real estate

• Chris Whalen · Whalen Global Advisors LLC

  Commercial real estate defaults will rise this year and next, as high rates bite.

  Higher interest rates this year have had a large impact on commercial real estate. Whalen expects more defaults in the commercial space this year and next, part of a broader year-long reversal for politicians, industry and finance.

  “It's also impacting commercial real estate a lot. You're gonna see more defaults in the commercial space this year and next year.”at 6:44

US Treasuries & yields

• Chris Whalen · Whalen Global Advisors LLC

  A big bond rally is unlikely; long yields may stay elevated or rise on Washington credibility doubts.

  Jim Bianco is bullish on bonds, but Whalen argues yields rose over the past six months not only because of inflation or the Iran war, but because markets doubt statements from Trump and Treasury Secretary Bessent. The Fed did not mention the deficit at its last meeting, and investors buying bonds expect a return to 4.25–4.5% yields that he thinks won't happen this time. Yields could stay put for a long period or go higher, depending on what comes from Washington.

  “I think this market could stay right where it is for an extended period of time, And we could even see long term interest rates go higher depending on what people see coming out of Washington.”at 14:57

US rates & the Fed

• Chris Whalen · Whalen Global Advisors LLC

  If the US slides into mild recession, the Fed will cut, possibly reversing recent hikes early next year.

  Whalen expects that a mild US recession this year or next would lead markets to expect Fed cuts. He previously predicted that early in the new year the Fed would either move to neutral or even have to take back some of the rate hikes discussed earlier. The Fed has been silent on fiscal and deficit pressures, which is part of why it has not been a source of disinflation.

  “So if, for example, The US slips into a mild recession into this year going into next year, they're gonna all expect the fed to cut. Remember I predicted at some point early in the new year, we're probably gonna see the fed either go to neutral or maybe even have to take back some of the rate hikes.”at 15:31

AI bubble & tech valuations

• Chris Whalen · Whalen Global Advisors LLC

  The rush into AI is overdone; spending far outruns the revenue needed to justify it.

  The AI boom is circular, with little real revenue. Whalen says it is partly driven by Wall Street having few other sectors to rush into, and firms supply credit and facilitation to fuel it. Consumer AI is free and enterprise revenue is still unproven, so whether AI pays off is unknown. He cites SoftBank's Masayoshi Son running out of money as a bad sign and expects consolidation, with many current AI companies failing. Nvidia's rally rests on chip sales to AI buyers, not proven earnings.

  “I think this whole mad rush into AI has been very overdone.”at 22:27

Consumer AI products

• Chris Whalen · Whalen Global Advisors LLC

  Consumer AI tools like ChatGPT and Google are fun but free, with no monetization in sight.

  Consumer uses of ChatGPT, Google and other AI tools are helpful for writing or finding data points, but they are not charged for. Whalen says consumer AI is a giveaway, which undermines the case that AI spending will generate revenue soon.

  “ChatGBT and Google and all the rest of them, it's fun to use. It's helpful when you're writing... But are they gonna charge me for it? No, absolutely not.”at 23:26

Enterprise AI adoption & AI software

• Chris Whalen · Whalen Global Advisors LLC

  Enterprises are gaining real value from AI and paying for it, via cost savings and risk management.

  Companies are getting positive benefit from AI and have to pay for it, often hiring consulting firms like IBM to implement it. The benefits include cost savings and risk management, with many enterprise use cases. Whalen still calls long-term profitability an open question, but enterprise is clearly where AI is being paid for.

  “On the enterprise side, AI is being used by companies. They are getting a lot of, I think, very positive benefit from it. And they have to pay for it.”at 23:38

AI pricing & unit economics

• Chris Whalen · Whalen Global Advisors LLC

  AI prices are falling as new cheaper entrants appear, even as capital raises fund the buildout.

  Every time Whalen looks, a new entrant offers a cheaper version of AI, so prices are falling while companies keep raising money to support the buildout. Combined with a lack of revenue and expected consolidation, where many current AI companies will fail, Whalen calls this a worrisome trend, even though the underlying technology will persist.

  “Every time I turn around, there's a new entrant who has a cheaper version... So the price of AI is falling even while we're raising money to support the build. That to me is a worrisome trend.”at 24:35

Banks

• Chris Whalen · Whalen Global Advisors LLC

  Bank stocks are going nowhere: earnings are strong but unrealized losses and weak lending weigh.

  Of the top 100 banks Whalen tracks, only four are up over the past three months while the rest are down single to low double digits. Third-quarter earnings should be strong from market activity, but Main Street lending is weak, expenses are rising, and loan and securities yields are up. With the 10-year above 5%, banks face significant unrealized losses on balance sheets. Single-digit coupons on bank debt and preferreds look unattractive versus Treasuries yielding 5–5.5%.

  “They're really not moving. There's only four of them that are up in the past three months. The rest of the group is down anywhere from single to low double digits.”at 24:56

US tax & spending policy

• Chris Whalen · Whalen Global Advisors LLC

  Some Trump-era tax cuts will likely be rolled back to close the deficit.

  Taxing labor and income is regressive, while taxing investment or the wealthy has limited revenue potential. Paying for the government requires a broad-based revenue effort. Democrats will likely propose taxes on investments, but the easiest step is reversing some Trump-era tax cuts.

  “And that's why I think you may see some of the Trump era tax cuts get rolled back. That would be the easiest thing to do.”at 31:37

Gold & precious metals

• Chris Whalen · Whalen Global Advisors LLC

  Gold's dollar price mostly reflects dollar weakness, so gold priced in yuan will diverge from dollar gold.

  When gold appreciates against the dollar, Whalen argues it is mostly the dollar going down. Investors should compare gold across currencies such as the yuan and dollar. He expects a growing divergence between gold priced in yuan and gold priced in dollars, which he links to a weakening dollar and the debt problems behind it.

  “Well, it depends on how you look at the dollar. Right? As we always like to remind people, it's not so much that gold is going up. When it does appreciate, it's the dollar going down.”at 31:57

Oil & fuels

• Chris Whalen · Whalen Global Advisors LLC

  Refined-product supply stays tight for years even if the Iran war ends; Gulf refinery damage lingers.

  About 25–30% of refining capacity in the Persian Gulf has been damaged, and rebuilding it takes years. The Houthis are attacking Saudi cities and refineries and won't stop. Even with oil in surplus, the wrong grades are in the wrong places, and refineries cannot easily switch crude. Oil prices won't fall until a regional truce is reached and refinery capacity is repaired.

  “Unfortunately, the damage that's been done to refined product is not going to go away tomorrow. If the war ended tomorrow, it would still take years to get that 25 to 30% of capacity that's in the Persian Gulf back online.”at 32:50

Renewables & clean energy

• Chris Whalen · Whalen Global Advisors LLC

  Progressive solar and wind policies will be set aside for at least the short term.

  With Middle East supply disrupted, places like California need refined product now. Whalen expects that renewable and clean-energy policy will be deprioritized for at least the short term, and that nations will shift toward local self-sufficiency and local refining capacity.

  “I think a lot of the progressive policies focused on solar and windmills and all the rest of it are gonna have to be put aside for at least the short term because places like California need refined product.”at 34:03