#427 Chris Whalen: Warsh’s Credibility Is Eroding, Private Credit Beats Regulators, Mortgage Pain Ahead

UWM Holdings

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

• Chris Whalen · Whalen Global Advisors LLCBullish

  UWMC has possibilities as its Oaktree-backed turnaround shifts toward responsible growth, though its sales target looks ambitious.

  Whalen says UWMC's new investors, Oaktree involvement, and hires such as Vandy Vartaj as chief investment officer should push the company to run more responsibly and rationally. He says the company had focused on market share at all costs, and that this has to change if it is to survive. He thinks the stock has possibilities, but the company's target of raising about $1.8 billion from asset sales looks ambitious, and he is not sure it will get there. The stock closed near $1.50 against a rights offering that needs a $2 handle. He has not bought the stock.

  “I think it has possibilities. I haven't gotten involved in the stock.”at 26:37

Flagstar Financial

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

• Chris Whalen · Whalen Global Advisors LLCBullish

  Flagstar's management will turn the business around despite New York multifamily problems.

  Whalen says he owns Flagstar shares, bought well below $10, and that the stock got as high as $15 and is around $10 now. He knows the management team and believes they will turn the business around. He cautions that Flagstar is a small, New York-based bank with a lot of multifamily issues, so it is idiosyncratic and its stock can move on its own. He did not endorse the preferred stock in the viewer question for individual investors.

  “Flagstar is a small bank. I know the management team. I love them. I do think they're gonna turn the business around.”at 31:56

AI infrastructure & data centers

• Chris Whalen · Whalen Global Advisors LLC

  Tech giants will have to fund the AI buildout with dilutive stock after relying on debt.

  Whalen points to Meta's decision to issue stock instead of relying solely on debt as a sign of what is coming. Tech companies have funded the AI buildout almost exclusively with bonds, bank debt and private debt, and he expects them to be forced to issue equity. He says this will dilute many names and will not make shareholders happy. He still argues that equity is the right way to fund AI if you believe the technology will pay out, citing the revenue growth seen at Anthropic.

  “You may notice that Meta has decided that they're gonna issue stock instead of relying solely on debt. And I think you're gonna see a lot of that.”at 7:07

• Chris Whalen · Whalen Global Advisors LLC

  Probably half of currently planned data centers cannot be built due to power and opposition.

  Whalen says the real difficulty is that probably half of currently planned data centers cannot happen. The reasons are a lack of resources, insufficient electricity to run them, and growing political opposition. He calls local opposition a rare form of grassroots democracy, driven by concerns about electricity costs. He argues that building their own power would make data centers more expensive and extend timelines. He expects the next year or so to force AI hopes set at the start of this year to be revised to fit political reality.

  “The real difficulty, of course, is that probably half of the data centers that are currently planned can't happen. We just don't have the resources to do it. We don't have the electricity to run the data center, and the political opposition is growing.”at 8:03

• Chris Whalen · Whalen Global Advisors LLC

  AI hardware is bought before it can be used, causing economic misallocation as chips age.

  Whalen says chip vendors such as Nvidia are financing their customers. Customers buy chips they cannot yet use, so the hardware sits in warehouses. Memory chips and other hardware do not improve with time, and they become significantly inferior to newer products. If the spend cannot be used right away, he asks why it was bought at all. He describes a huge amount of economic misallocation in AI spending that will have to be sorted out.

  “The Nvidias of the world are out there financing their customers. Customers buy chips from Nvidia, but they can't use them yet.”at 9:16

US housing

• Chris Whalen · Whalen Global Advisors LLC

  Mortgage delinquencies will rise, first in government loans and then in non-agency rental loans next year.

  Whalen expects delinquency to rise in mortgages, particularly government loans. Ginnie Mae issuers must advance principal and interest while loss mitigation takes years, which creates a funding burden, unlike conventional loans where Fannie Mae and Freddie Mac reimburse issuers after four months. He also points to the boom in non-agency rental and business-purpose loans, which is starting to turn, with higher delinquency expected next year. He cites double-digit fraud rates in Baltimore, where life insurers and private credit investors have been buyers, and expects those investors to lose money.

  “Well, I think delinquency is definitely gonna rise in the mortgage space, particularly in the government space.”at 21:28

• Chris Whalen · Whalen Global Advisors LLC

  Mortgage volumes will fall, with refinances dropping below 20% of volume.

  Whalen says fourth-quarter mortgage production will be light, which is normal seasonally but signals higher delinquency, higher expenses and lower volume for lenders. Citing Stan Mittelman, he says refinances are more profitable for lenders because borrowers usually return to the original lender, while purchase loans are costly and easy to lose to competitors. He says the industry is suffering because refinances are going to fall to less than 20% of volumes. The 'by next year' timing was supplied by the host in the exchange.

  “And I think the industry is suffering because refinances are gonna be less than 20% of volumes”at 24:11

US rates & the Fed

• Chris Whalen · Whalen Global Advisors LLC

  Warsh's lack of action on Fed reforms and inflation is eroding his credibility.

  Whalen argues Fed Chair Kevin Warsh has talked a lot about fixing Fed plumbing, including the gap between fed funds and repo rates and the rate paid on reserves, which are currently the same, but has not acted. He says a symbolic quarter-point move this month would have helped. He also says Warsh talks about returning to the 2% target without explaining how and offers mostly administrative changes rather than substance, while the Fed has been far from its inflation target for years. Whalen expects no radical near-term changes, since Warsh is waiting on task forces, but expects significant changes over his term. He frames the credibility problem as part of a broader Washington lack of believability.

  “And Warsh has talked a lot about fixing many of these things at the fed, but he hasn't done it. So his lack of action, I think, is starting to erode his credibility.”at 3:43

US Treasuries & yields

• Chris Whalen · Whalen Global Advisors LLC

  Treasury deficits and issuance, not the Fed, are driving long-term yields higher.

  Whalen says the Fed is marginalized because the Treasury's large deficit is the largest factor in markets. Long-term rates rose earlier this year and have not come down from that peak, largely because of Treasury issuance. He also points to Treasury Secretary Scott Bessent's buybacks of Treasury securities. He calls these moves political with no real substance, but says markets did not like them.

  “Well, the Fed is kinda marginalized at the moment because the treasury and their big deficit is the largest factor in the markets today.”at 4:07

US elections & politics

• Chris Whalen · Whalen Global Advisors LLC

  Democrats likely gain 20+ House seats; Senate is a toss-up but Democrats could take both chambers.

  Whalen expects Democrats to pick up 20 or more House seats, perhaps more. He sees the Senate as a toss-up, but says Democrats could easily take both houses. He says a Democratic win over Susan Collins in Maine would show a shift to the left. He notes that progressives are more unpopular than Trump, and that Trump's management of the economy polls poorly, but Democrats poll even worse. Both parties are unpopular and not addressing what people want to hear about.

  “Well, I think democrats pick up 20 seats plus in the house, maybe more. I think the senate is still a bit of a toss-up, but you could easily see the democrats take both houses.”at 5:31

Private credit

• Chris Whalen · Whalen Global Advisors LLC

  NAIC's retreat leaves insurance policyholders unprotected; federal insurance regulation will eventually be needed.

  Whalen says private ratings are a major revenue source for rating agencies. Smaller agencies have been permissive in order to get lower NAIC capital requirements for loans. Private credit firms such as Apollo and Brookfield own insurers and rely on those ratings to lower their cost of capital. When the NAIC asked how the ratings were reached, the industry pushed back and threatened to sue, and the NAIC backed off. The NAIC is only a trade association, so there is no proactive review of ratings or of the assets backing annuities and life policies. Problems will only surface when an insurer fails, so federal insurance regulation will eventually be needed.

  “So I think it's unfortunate because what it means is that if you have life insurance or if you have an annuity that's issued by one of these companies, there's nobody looking out for you.”at 17:41

Banks

• Chris Whalen · Whalen Global Advisors LLC

  Banks' private credit exposure is indirect, via wholesale lending to nonbank lenders.

  Whalen says banks are exposed to private credit to the extent they lend to private credit firms. They generally do not get involved in the underlying assets, though they sometimes provide warehouse financing for mortgages. Banks mostly provide wholesale credit to nonbank financial companies. He compares this to the way banks now finance trading firms such as Citadel, rather than trading the risk themselves. The risk is real but indirect.

  “They are exposed to the extent that they provide credit to the private credit firms. They don't tend to get too involved in the actual assets.”at 20:23

US deficit & government debt

• Chris Whalen · Whalen Global Advisors LLC

  A $2 trillion deficit is running the economy hot and blocks a return to 2% inflation.

  Whalen calls the economy K-shaped, with the top doing well and the bottom not. He argues that running a $2 trillion fiscal deficit means the economy is running hot. That is why Fed Chair Warsh cannot credibly talk about returning to the 2% inflation target unless he addresses the fiscal issue. Growth is reasonable but not fast enough to pay down debt or deliver the promises made by the Trump administration. He concludes that the economy is running hot because of the deficit, and that this growth is not enough to fix fiscal problems.

  “When you're running a $2,000,000,000,000 fiscal deficit, you're running the economy hot. That's why Kevin Walsh can't really talk about getting back to the 2% target for inflation unless he starts to address the fiscal issue.”at 28:04

US inflation

• Chris Whalen · Whalen Global Advisors LLC

  War-driven energy and input costs are still moving through the economy, with diesel up 25% y/y.

  Whalen says some core inflation numbers are not that bad, an argument drawn from Ralph DelGuadici's work, and this is why Warsh has been willing to wait before raising short-term rates. But diesel is up 25% year over year, and that is rippling through the entire economy. He also points to fertilizer costs for next year. He says the war's effects are still moving through the system and that we do not yet see all of them. He focuses on producer prices, which he thinks are a better signal than consumer prices.

  “On the other hand, diesel's up 25% year over year. That is rippling through the entire economy.”at 29:50

Agriculture & food commodities

• Chris Whalen · Whalen Global Advisors LLC

  Fertilizer prices up tenfold will cut farm yields and push up food prices next year.

  Whalen says fertilizer for next year will affect food prices. He expects lower farm yields around the world because farmers cannot afford fertilizer, which has risen tenfold in price. He presents this as one of the war-related impacts that are still working through the system and that will feed into prices in the coming year.

  “We are going to have lower yields on farms all around the world because people can't afford to use fertilizer. The prices have gone up tenfold.”at 30:04