#424 Chris Whalen: Fannie & Freddie Stuck, Foreclosures Rising, Credit Problems Coming

Federal National Mortgage Association

• Chris Whalen · Whalen Global Advisors LLCBearish

  Fannie Mae won't be released from government control during Trump's term; the stock's rallies on privatization talk are a pump and dump.

  Whalen says the stock surges every time FHFA head Bill Pulte or Treasury's Bessent comments on privatization, then falls back, so he calls it a pump and dump. He argues release is not possible during the Trump term because the GSEs have done no work and are not prepared to be private: they lack management and need investment in systems and controls. The US owns about 95% of both GSEs on a fully diluted basis, and paying for the government guarantee keeps accruing shares to Treasury. Moody's and S&P would likely downgrade them if the US stake fell below 50%, so the government will not risk that. His preferred structure is for the US to buy back all common shares, making it the sole equity holder, with the public participating through nonvoting preferred and debt, as Annaly does with agency pass-throughs.

  “...there isn't really a possibility of release of the GSEs during the Trump term. They have done no work. Neither of the GSEs is really prepared to become a private company again.”at 2:23

Federal Home Loan Mortgage

• Chris Whalen · Whalen Global Advisors LLCBearish

  Freddie Mac won't be released from government control during Trump's term; the stock's rallies on privatization talk are a pump and dump.

  Whalen says Freddie Mac shares, like Fannie Mae's, surge on comments from Pulte or Bessent and then fall back, which is why he calls it a pump and dump. He argues release is not possible during the Trump term because the GSEs have done no work and are not prepared to be private: they lack management and need investment in systems and controls. The US owns about 95% of both GSEs on a fully diluted basis, and paying for the government guarantee keeps accruing shares to Treasury. Moody's and S&P would likely downgrade them if the US stake fell below 50%, so the government will not risk that. His preferred structure is for the US to buy back all common shares, making it the sole equity holder, with the public participating through nonvoting preferred and debt.

  “...there isn't really a possibility of release of the GSEs during the Trump term. They have done no work. Neither of the GSEs is really prepared to become a private company again.”at 2:23

Meta Platforms

Across the shows: 41 speakers in other episodes, 42 bullish and 18 bearish calls, past 30 days

• Chris Whalen · Whalen Global Advisors LLCBearish

  Meta's scramble to raise money for its AI strategy is a warning that an AI company stumble could spook the Fed.

  Whalen points to Meta this week being out desperately trying to raise money for its AI strategy. He sees this as a sign of financing strain in the AI buildout. A big stumble or default at one of these AI companies could force the Fed to get more involved in markets, which would matter for the Treasury yield outlook. The argument is brief and more a risk observation than a detailed case.

  “You've seen what's going on with Meta this week as they're out desperately trying to raise money for their AI strategy. If you have a big stumble or a default with one of these AI companies, that could spook the fed”at 20:36

Annaly Capital Management

Across the shows: 1 speaker in other episodes, 2 bullish and 0 bearish calls, past 30 days

• Chris Whalen · Whalen Global Advisors LLCBullish

  Annaly is his biggest position; he'd add below book value because it manages rate cycles better than typical REITs.

  Whalen says Annaly is still his biggest position and he will probably buy more below book value. He thinks Annaly's management has the skills to run the portfolio through the cycle. Unlike most REITs, Annaly is an issuer of securities: it buys loans and packages them, and about 20% of its capital is in mortgage servicing assets, which rise in value when rates go up. That gives it more tools for a higher-rate environment than a REIT that simply buys securities and hedges the ends of the curve. He says investors own REITs for income, and Annaly's stock was trading near two times book in COVID because people wanted income. He calls it a surrogate for Treasuries, since it holds government-insured securities and levers them.

  “It's cheaper. Therefore, I think it's attractive to add... So, you know, [Annaly] is still my biggest position. I'm probably gonna buy some more of that if it gets below book value.”at 26:35

US housing

• Chris Whalen · Whalen Global Advisors LLC

  Foreclosures will keep rising as the market turns to a buyer's market and COVID-era mortgage relief is gone.

  Auction.com data shows foreclosure auction volume up about 25% year over year. Whalen says the Trump administration removed the COVID-era special treatment for defaulted government-backed (FHA and VA) mortgages, so borrowers now get one chance to reperform before foreclosure or a short sale. This has been manageable because home prices are still 40-50% above pre-COVID levels, so sellers can clear the loan with cash left over. But home prices are softening and the market is moving to a buyer's market, so he expects foreclosures to keep rising in residential mortgages and in business-purpose loans. Delinquency is rising from a low base and is still below 2019 and early-2020 foreclosure levels, but lenders' delinquency handling is now nearly identical to pre-COVID practice. He expects these numbers to gently keep rising.

  “The Trump administration eliminated all of the special treatment for defaulted mortgages that was put in place by the Biden administration during COVID... However, home prices are softening. We are going into a buyer's market as opposed to a seller's market.”at 9:16

US Treasuries & yields

• Chris Whalen · Whalen Global Advisors LLC

  The 10-year Treasury yield will stay roughly where it is and won't fall to 4% or lower without the Fed buying bonds again.

  Whalen agrees with Ralph's view that the 10-year has given back a lot of ground after going above 5%, and that underlying inflation excluding energy could push the Fed to ease. He disagrees on the size of the move. Between 2008 and the end of COVID the Fed bought about $10 trillion of securities, taking duration out of the market and keeping rates low. Unlike the Fed, Fannie and Freddie hedge their purchases, which nearly cancels the effect. Without the Fed leaning on the market, he does not think the 10-year returns to 4%. He expects yields to stay more or less where they are, with a possible modest decline. A trigger like an AI company default could make the Fed buy again, and Kevin Warsh is likely to be more cautious and avoid buying bonds.

  “we are probably gonna see ten year bond yields stay more or less where they are. They could continue to come down a bit. But are we gonna go to 4% or lower? I don't think so.”at 19:16

Gold & precious metals

• Chris Whalen · Whalen Global Advisors LLC

  Gold is an asymmetric trade and he is adding on weakness because central banks are diversifying away from dollars.

  Gold prices have eroded, and short-term investors have lost interest. Whalen says global central banks keep buying because they want to diversify reserves away from dollars, and gold is now the largest reserve asset of global central banks. He calls gold an asymmetrical trade and says it is cheaper now, so it is attractive to add for long-term investors. He says he may keep adding to his gold holdings. He warns against overconcentration: someone who put most of their portfolio into gold at the peak is now struggling. A modest portion of the portfolio belongs in precious metals, with income and liquidity elsewhere.

  “Continuing to buy. They wanna diversify their reserves away from dollars, and gold is now the largest reserve asset of global central banks.”at 21:39

US rates & the Fed

• Chris Whalen · Whalen Global Advisors LLC

  The Fed will likely pause in October; Warsh may abstain from a hike even if a majority favors one.

  Whalen thinks a majority of the FOMC may favor a hike, but he doubts Chair Warsh will vote for one. Warsh may abstain again, as he did before, by letting the rest of the committee vote. Whalen still thinks the Fed may pause in October. The main risk to that is the Iran situation, which could push oil and energy-driven price pressure up. He also argues that Warsh is much more cautious than Powell, and that Yellen and Powell both did too much, with negative consequences for markets.

  “There may be a majority on the committee for a hike, but I'm not sure chair Wash is gonna vote for a hike. He may abstain again... So we'll see. I still think they may pause in October.”at 23:20

Middle East & Iran

• Chris Whalen · Whalen Global Advisors LLC

  Renewed US and Israeli bombing of Iran would push oil prices higher and pressure the Fed to act.

  Whalen calls the Iran war the big question mark affecting markets. If the US and Israel start bombing Iran again, oil prices would rise. That would put pressure on the Fed to act, because energy-sector price pressure is already present, with food prices up. He notes that the US has more or less gotten the Strait of Hormuz under control and oil is moving through it, but he sees a renewed strike risk.

  “If The US and the Israelis start bombing Iran again, then I think you see oil prices go up, and it's gonna put a lot of pressure on the Fed to act”at 23:39

Consumer & retail

• Chris Whalen · Whalen Global Advisors LLC

  Consumer products companies face margin pressure because higher diesel prices raise the cost of trucking goods to stores.

  Diesel prices are not coming down, and Whalen says trucks are the way goods reach stores, whether durable, nondurable or food. Higher diesel costs squeeze margins for consumer products companies, and he expects that pain point to continue. He tells investors to be careful with these companies. Natural gas prices are down, which helps, but diesel and other refined products stay elevated.

  “I think you've gotta be careful with consumer products companies here because they are suffering a lot of margin pressure due to higher diesel prices. Trucks are the way we get stuff into stores.”at 25:11

Credit markets

• Chris Whalen · Whalen Global Advisors LLC

  Credit will become a bigger problem; years of low rates have subsidized housing and credit, and portfolio problems are surfacing.

  Whalen expects credit to be a bigger problem going forward than it has been, and ties this to his foreclosure view. He argues that interest rates have largely subsidized housing and credit for years, so the problems in lenders' portfolios are now starting to bubble to the surface. He expects higher foreclosure activity next year because the credit cycle has run so long. He calls the financials an interest rate play, which means their outcomes depend heavily on the rate path.

  “I continue to think credit is gonna be a problem going forward or a bigger problem than it's been.”at 25:25

Banks

• Chris Whalen · Whalen Global Advisors LLC

  He is very cautious on all financials because their results depend on interest rates and credit problems are building.

  Whalen calls financials basically an interest rate play, and he expects credit to become a bigger problem. He says years of rate policy have subsidized housing and credit, so portfolio problems are now coming to the surface, and he expects higher foreclosure activity next year. Against that backdrop, he says he is very cautious on all of the financials right now. Julia notes he has gotten out of banks, but he does not confirm a current short position.

  “So I am very cautious on all of the financials right now.”at 26:06

Russia & Ukraine

• Chris Whalen · Whalen Global Advisors LLC

  An unexpected turn in the Ukraine war could hit global markets, as Russia escalates against Europe and Putin won't concede.

  Whalen calls the Ukraine war his biggest under-discussed risk. Russia, having lost on most of its objectives, is attacking European countries directly and with sabotage to save face. Putin does not want to concede defeat, so the conflict could spin out of control. Europe still strongly supports Ukraine, while President Trump appears to be making side deals with the Russians. He says an unanticipated turn in the conflict could significantly affect global financial markets, and that the Iran situation already shows how these events move markets.

  “I think an errant event coming out of the Ukraine war... I'm a little bit concerned that this whole thing could spin out of control because Putin can't make peace.”at 30:06

Oil & fuels

• Chris Whalen · Whalen Global Advisors LLC

  Refined product prices will stay very high for years because Gulf refining capacity is gone and takes years to rebuild.

  Whalen argues the world has too much crude oil, and energy efficiency has reduced oil demand. The binding constraint is refined product. About 20% of the world's refined product supply was in the Gulf and is now gone. Rebuilding and repairing that capacity will take years, and any further disruption extends the timeline, so refined products and derivatives will keep high prices. He ties this to inflation and the political reaction in Europe, where people don't have enough gas for the winter or enough petroleum from the Middle East to make refined products. He says he balanced his portfolio toward energy at the end of last quarter.

  “we have too much oil. The world is kind of a wash in oil... we need refined product. And 20% of the world's supply of refined product was in The Gulf, and it's now gone.”at 31:24

Natural gas & LNG

• Chris Whalen · Whalen Global Advisors LLC

  Europe faces a winter gas shortage, while US onshore gas supply gives America an energy security advantage.

  Whalen says people in Europe know they don't have enough gas to get through the winter, and they also lack enough petroleum from the Middle East to make refined products. He ties this to inflation and the riots in Europe. In contrast, the US has a lot of these assets onshore, including natural gas in enormous abundance. That gives it a very different energy security position. The argument is brief and more a macro observation than a detailed case.

  “people in Europe know that they don't have enough gas to get through the winter. So what are they gonna do?”at 32:12