Chris Whalen: "Panic, Bubbles & Liquidity Shocks" (Hedgeye Investing Summit)

[Music] I'm Keith and welcome back I thought that was an excellent discussion with Nadine a good back and forth on how a modern day portfolio managers risk managing these markets in the cycle now I want to get into a I was gonna call it a rabbit hole it's actually a massive rabbit hole on a rabbit hole set of topics I guess a series of rabbit holes here Chris that only Chris Waylon can really dig into each and every one of them you know within the banking system I know you'll have a lot of questions on that so please fire your questions into the queue they'll be voted on and then I'll ask them but Chris thanks for thanks for making the time as always I appreciate it yeah so today you know you got people that are freaking out for whatever reason they are today but they're like oh my god you know JP Morgan said this Wells Fargo said that and the bank stocks didn't go down today can you get into you know we went over it on our in our morning meeting relatively low versus what we thought they should have taken JP Morgan loan loss provisions for example you know that topic in particular you have an explicit view on so maybe you know go through that view and and and frame it within the lens of what JP Morgan had to say well what I looked at the industry Keith in my earnings done over the weekend I was trying to figure out what do we do with this crisis because it's different from 2008 but it's also very clear that unemployment which is the first factor in any credit model is going to be very important and also small and medium sized enterprises they're going to be go through the meat grinder so when you put all that together you end up with not just high levels of the fault for both banks and bond investors to deal with but you also deal with the economic consequence which to me says we're going to go into an l-shape recovery we're going to kill a lot of the service sector it's not very well capitalized they don't have the money to be out of business for two months you can keep everybody on the payroll so would we emerge from this I think we're going to see a US economy where a lot of the services sector that we've depended on in the past for employment growth just isn't going to be there the banks themselves are fine they are over capitalized they stop share repurchases which is what you would expect and that's enough we don't even have to talk about dividends Keith it's a hundred ten billion dollars in new capital funds are gonna be retained by the banks because they're not doing share buyback and that's enough to fund your reserve bill by the way well I think I mean it and that's kind of like you something summarily just knocked down all the pins like absolutely good but taking each pin out like let's go through them because you've said that I think you said that loan loss provisions can double than double and some people think okay look you know what just happened at JPMorgan or Wells Fargo's as bad as it gets like why is that not the case well the banks and and really all lenders don't know what's coming yet they have a lot of ideas and anecdotal terms and there are a lot of credits that have certainly slipped from okay into special mention at the end of this quarter which is how the regulator's view these things but we still don't know what the totality of defaults this court are going to be and how that's going to play out for the rest of the year so my guess is the banks like JP and Wells are going to take some hickeys now they're going to put some money aside for low losses but then they're going to have to go through the entire second quarter and deal with all of that not just a credit component but the operating component expenses all the stuff related to doing high-touch servicing for distressed borrowers consumers businesses doesn't matter it's ten times more expensive when somebody has a problem so when you put all that together my sense is the industry is going to be hurting on the expense side in the second quarter and they're also going to pick more credit loss provisions because if we're at 25 or 30 percent unemployment short-term in this country then we're talking about the nineteen third in terms of dislocation yeah and I the banks will still be fine but will consume most of their income this year well I mean that's the big difference too when you talk about you know the cyclical loan loss provisions that the companies report quarterly and then the systemic issue which you've just highlighted so can you go through that the difference between that on the employment side and no.8 in particular look in oh wait we had dislocation we certainly had a lot of job losses you saw in the unemployment numbers but by and large the rest of the economy the services economy everything else they'd had to slow down in town size but we didn't just cut large chunks of it out so that they're not there anymore and I think in the hospitality sector and the travel sector anything related to those types of services we're going to find out that even when we get people back to work these services just aren't going to be there so I think for banks the expectation of loss is quite high but again remember we're not talking about a systemic liquidity crisis where we had trillions of dollars worth of mortgage securities subprime mortgage securities that nobody wanted we've had some of that in the bond market but to their credit the Fed has come in and really done a great job of stabilizing the market for the moment but I think going down the road we have to anticipate that both financial institutions and bond investors across all these sectors that are not supported directly by the government like auto loans credit cards all of those sectors are going to see big big defaults yeah when you look at that I mean we we've done all the work historically of course at least we've tried to be macro we're at a base level on that in terms of what this actually means and I I have a hard time not characterizing the labor market and the consumption drawdown as anything other than a depression now you can't call I don't have to call it the Great Depression because that's the greatest depression ever but the numbers that we're gonna have here are pretty damn close to where they were back then guys if you want to throw up slide slide to I think 34 in the current macro deck how do you think about that because a lot of people that I talk to I mean we talked to you know the same types of people I suppose if some people want to believe that some people can't afford to believe that their there are a lot of different there are a lot of different paths I go down on this one Chris because you know as Yogi Berra would say you get to a fork in the road and you take the fork but you know what what is it about a depression on the employment side that we have no case study other than the depression that should be concerning here well the concern of course is that when you allow deflation to run through an economy you destroy a lot of jobs and you destroy the enterprises that create jobs which are small businesses they don't come back immediately it takes time for that to occur and so I think when you're you're left with there's a large body of the population who may not be able to find employment and they may need long term support this is a big big issue I think because again I I think we're going to see an l-shaped recovery in other words we're going to get people back to work and yet we're gonna find that GDP is dropped down 10-15 percent in terms of the run rate now I think the same thing will then be reflected in Ernie you know think about the drop in credit card transaction over the last month because nobody's going out there spending money retail sales are out but I think when you really look at some of the internals for the banks and payments in other areas you're gonna find out that it dropped off rather significantly no mortgages I was talking about banks getting back into sector in the beginning of the first quarter now no they're totally withdrawing in fact you'll find this amusing Keith but the only ones supporting the secondary market this week or non-bank Penny mag mr. Cooper all the rest of them freedom they're out there by loans from independent mortgage banks the commercial banks have disappeared JPMorgan slammed the door last week basically shut down their warehouse lending for non-bank mortgage companies so you know the private sector the sector that's not supported directly by the government which includes the banks is going to suffer and the banks are going to be protected as they always are well then that's a it's an interesting debate too I mean we talk everyone wants to talk about fed liquidity and I want to talk to you about that too but you know the difference between at a very basic level Chris because you're a good teacher you know what is the difference between liquidity and solvency that we should be concerned about here well liquidity is when short-term demand for an asset class changes very suddenly so you saw high-yield debt run-up and yield to ten points over Treasuries its comeback special assets it don't particularly fit into the you know the square hole but for example of floating rate mortgages those are not deliverable in the mainstream TBA market that we used to do securitizations so there was no big specified pools which happen to be the mortgages of low-income borrowers and again very specialized market stop non-qm loans fix and flip mortgages all of this stuff that was what we call the fringe market a non-bank consumer finance it's all gone yeah it's like California and Texas in the spring when you have the flower is growing and then when the Sun comes out later this season it's all gone that's essentially what we've seen here well what so can you take me back to like pre the season changing and using that metaphor it and like pre virus and where we are post I mean how much has the world changing and how much market risk is associated with a lot of these different you know what I'd call super procyclical late cycle investments that people made you know what do you think the world really you know has now in a bag of risks on that front the risks are rather considerable and they go on and on they're difficult to really quantify so first and foremost new issuance in most of these sectors is pretty much dried up so companies that needed to go back to the market and refinance their debt or not to be able to do on anything like the terms that they were anticipating you know you think of people like we work you think of all kinds of other leveraged enterprises that we're using high-yield debt to buy back stock for example or or any other that's over and I saw that by the way at the end of last year the new issue market and abs and corporates was slowing considerably yep and yet you know we didn't notice so going forward I think you can have large sectors of the world of non-bank yes asset-backed securities collateralized loan obligations no they're not coming back any fun so I'm sorry even if the Fed is out there buying triple-a washes of existing deals it's going to be very very very difficult to get investors to come back to the table my favorite by the way you want a poster child for this downturn Keith the credit risk sharing securities issued by Fannie Mae and Freddie Mac okay they traded down in in 270 because these securities are not eligible they're not agency securities they're just corporate debt and there was nobody trading them so I think any notion of taking Fannie Mae and Freddie Mac out of government control is pretty much dead now if you look at the way those securities behaved I mean imagine if they were already out of conservatorship and they were out there trading like you know penny Mac that would not have been good yeah let's just dig into that you know to a couple of those points a little deeper I mean you mentioned CL OS I think that might be a little out there for people but not not something like in and you've talked about this BDCs pick any leverage long investment REITs and how they fund their business you know REITs is a massive component of any quote/unquote diversified equity portfolio right now maybe use that one because that's the one that people probably would care the most about but again you could talk about whatever you want yeah well the REITs are interesting they're very diverse you have read sodon't buildings the equity REITs and then you have the agency REITs that typically on mortgage-backed securities and then finally you have hybrid you have people like new residential the fortress managed sperm that loans everything they own mortgage servicing they own whole loans they own consumer loans and what's happened is the liquidity around a lot of those asset classes disappear and many of these Reed's not just NRC but a whole class of them that had provided a very important investor component to these markets and we're encouraging the growth of the non-agency mortgage market construction loans all sorts of things as is basically just disappeared so those Reed's were forced to be clever they were forced to sell all of their not right people and go back through square one and that's where they are now a lot of people are looking at them as potential investments you know they're looking at the yields but I would just point out to you that leverage upon leverage upon leverage all the way up the stack in these entities is dangerous and remember reached don't have capital they can't retain any capital buffer they have to pay out all of their earnings pretty much every year to investors so they're basically a pass-through and that's why the Fed the other regulatory agencies in Washington have always been very careful with REITs that would never let a read out of pain or anything like that and and I think unfortunately these and the funds that were involved in real estate Heath are really the losers you know the non-bank mortgage companies they're gonna have a lot of work to do over the next couple years but they're going to make a lot of money on distressed loans as they fix them and they're gonna have a huge crop a very very valuable servicing asset yeah well yeah the distress these loans won't prepay for over a decade what's the reason yeah your that your eyes got really big when you start talking about the opportunity and distress I mean that's right but I talked to how we make money and mortgages exactly but it's been it's been a long time coming for people that don't know what a distress cycle looks like I mean it's been 120 nine months of us economic expansion so you don't really you haven't had one I mean I've interested in your feedback on this one of the biggest distress investors that actually is still around with Klein of ours as having a call with him last week and and they were like really like Keith like are your are your guys and gals there on the equity side put and this was post you know the feds whatever infinity move yeah they're like really do they think we're actually gonna bid up here yeah like what what gives here they were almost dumbfounded by where you know some of these marks have gone in public markets relative to where they'd be willing to or they'd be willing to buy them for real like and how quickly we bounced yes I mean Wall Street is showing it capacity to get comfortable after anything you know the Antichrist could appear on lower Manhattan and I think they'd get comfortable with that right yeah but I mean it's just to me it's a we have also have guys throw up slide 74 crystal have some thoughts on this it's just endemic to something that was already cracking in the credit cycle for it to go full-bore what I'm showing here is total delinquencies CNI loans and leases of US commercial banks under your rear basis and if you go back to the prior to you know just the two that I've had to risk managed through which is the 2000 to 2002 period and of course o8 why wouldn't it be with this kind of leverage in the system on the corporate side just this protracted playing out of on this chart people can see this under if you can see it but the red line as opposed to this oh it's one and done the feds in we're all good well the market risk component the Fed has been very helpful we're still gonna have ugly marks look at the MSR mark the JQ mortgage just reported my god they cut the value of their servicing by a third yeah in in one quarter that's because of the market volatility but I think in these other asset classes you know C&I lending which didn't do so bad in the 2008 crisis really you know I had normal performance for a recession that's gonna be a very hot area I think multifamily real estate which had been on a tear rental properties all of these things were you know investors were flowing this time around in real estate it's an institutional and a commercial story although residential is also going to be ugly so you know there are cycles for these things yeah and I think my god the cleanup in rental properties for example after months of moratoria you know tenants just leaving it could be quite interesting you know Keith think about how many young people who worked in the services sector in New York City have left in the past 60 days and they're not going to come back yeah well I mean I mean for a whole generation it's a first time they've lost their job let's let's just start with that but so so bridge the gap for me and just simplify this for people all right cuz it takes you said it takes time to work out it takes time it's the cycle stupid is what I try to boil down to but again but you have the Fed you got epic liquidity you got forbearance all the stuff in the short-term like I said good job you guys did you know what you're employed to do but what happens next if time and space is just an economic depression and/or resuscitation into some version of a recession what happens next what do they do next well next I think is you see the slow reopening of most of the economies you get the people back to work that you can get back to work but you find out that a lot of the investment structures that were created during the boom the Fed induced boom and the asset appreciation phase are just not going to be viable so they're gonna be restructured the good news is the commercial real estate those sorts of investments are all professionals sitting at the table the wipeouts the equity they'll recap the structure they'll convince the original manager to stay in there give them some equity and off they go they'll they'll extend and protect right in the resi side you're dealing with consumers you're gonna end up with a lot of defaults I think half the people that look for payment assistance on their mortgages are going to default if ultimately and then with all the commercial loans again professional defaults that sort of thing but when you don't have a lot of demand and services and for service businesses those little owner-occupied properties that were so popular and major urban areas are basically going to be completely orphan nobody's gonna want them and the banks are gonna end up in many cases just charging off those properties and getting rid of them it would be a big opportunity for the vultures here they're already gathering large number yeah but it could be quite ugly for earnings for a while and again bond holders on the non-agency paper are gonna pay the freight that's what it comes down to how do you think the handoff looks from private equity procyclical private equity alcohol to you know to to the distressed side i mean a lot of them a lot of the older shops I mean if I go Apollo for example I mean you go back to I think in 1990 yeah they're set up for this but not all not all the procyclical newbee private equity shops are no but they'll figure it out you'll see the lawyers ship the restructuring and away from new issue business there's going to be a whole redeployment in the professional sector to deal with this stuff and you know you mentioned private equity you think about oil back in 2015 when I was still working with my friends with pro bond ratings we were waiting for the apocalypse in the oil sector we had half a dozen fairly large community lenders that were focused on that business cadence you know with Paul Murphy great banker and yet it didn't happen because yet private equity came to the rescue this time around I think the degree of Christ's broth and oil and other types of services around the sector is going to create a feast for the vultures Mike I can't believe the private equity guys are just gonna show up again and recap these companies and keep them in business at these price levels well I mean it's it's an it's an interesting setup I mean a lot of the new deal flow obviously if not all of it is is shut down and now a lot of these private equity companies are dealing with them trying to deal with losses at the portfolio companies which is on I have somebody party is is going back to our metaphor about the highway you know flora in California in Texas if prices come back and shale then the companies will come back they'll just grow back yes it's what the Saudis and the Russians crazy to say they think they can kill this but I know we'll just recap both eyes as we bring them back now how about on and again if you guys have questions please pop them in the queue but for those of you that don't know you know Chris is a historian on many levels you wrote a book on the on the auto industry of the Fords in particular what do you think happens to auto here oh it is going through something that looks an awful lot like the 30s which were very tough for the industry the only thing that saved them was the war because the government paid them cost-plus the build tanks and planes I think this is gonna force a lot of consolidation in the industry my favorite you know speculation has been you'll see Volkswagen and Ford get together because VW you know they're one of the survivors in the in the global auto racer big one Japanese firm probably built around Toyota and then you know what do you do with the Germans I mean you put BMW together with Daimler BMW smallest survive on their own in a market where we're at half of the run rate we were at last summer right yeah you know that there's not enough sales for them all to stay alive so we're gonna have to figure this out I guess they can build ventilators for a while but they ain't gonna fix the problem and another book you wrote in the Oman fraud you know confidence stuff like that financial stability what what what do you think where do you think where do you think I should say we're at in terms of the fraud cycle we've actually seen some some epic frauds on the Chinese equity side already I haven't seen haven't seen the Big Kahuna's in the USA yet but I have a sneaking suspicion there there there there is always a hot spot somewhere in finance my senses the bond market especially some of these covenant light deals that were done are really going to be problematic for investors as these companies are downgraded and end up getting restructured right you know the key point about that book I wrote was read fall camp you know it was really that benevolence gets you more bang for the buck so even though we probably overreacted somewhat mid-nineteen in terms of the medical response in the civil response that's okay but we have to be helpful to people because if you preserve jobs you know you see people like Amazon out hiring people and they're just telling them come on we'll give you a job come help us and then you can go back to the way they were doing that's very important yep to the extent we can keep things intact we can keep lives and businesses intact it's going to help down the road and that's really my big concern you have a lot of people in the industry unfortunately in Washington who don't take this view and they don't understand it being miserable ends up giving you a lot of economic pain whereas you being a little bit generous and you know for example helping the the the loan servicers deal with this forbearance oh my god you know we we have millions of people we're told they don't have to pay their mortgage what do we do with this yeah people paying their mortgage them you know small businesses not being able to pay their rent on that on that topic today again a couple eight Kay's filed JPMorgan lent through the SBA loan program ten twenty million bucks to I forget which one - which but Ruth's Chris and pot-bellied pot-bellied Corp great name for for a little pork there but I mean did like how does that how do you think that plays out in America that's a it's a bit of a that's a big of a bigger question but you again picking winners and losers I mean there's a lot of mom-and-pop restaurants that aren't getting jack in terms of that SBA loan program at least not yet that's right that's right and I'll give you a great example of changing it a lot of business people use the palm palm filed bankruptcy immediately yep and lay their people off and a lot of my friends reverse it and there's no no no this is what's called a beginning this is a negotiating tactic because the obligor Rolo's leases around the u.s. it's never to turn to the landlords and say do you want us to stay in the building and the landlord who's faced with having a vacancy is going to have to think long and hard about maybe coming up with a solution and I think you're going to see that play out all over the place because a lot of chain restaurants for example they're owned by Reese the last thing the REIT want is for that chain to close off they're going to do everything they can to help their parents and if you talk to anybody in the multifamily or the commercial world your chief concern Keith is well-being if their parent yeah and that's how and that's how it's gonna play out because there there are commonality of interest here yeah you don't want them the clothes you know I live in a building on Central Park South we have two restaurants downstairs I can guarantee you that the landlord is a dear friend of mine bill hemmer dinner well the great men of New York real estate he's going to be making sure that those tenants are okay yeah I mean that's on our call today Howard penny I think you you've known Howard for a while he's like I said well how did that happen how did the pork belly and the Ruth's Chris get to the front of the line and he's like Oh cuz they're clients of JP Morgan of course I mean that's the answer it's a simplest answer they're taking care of their clients so that's a that's that's an interesting one there's also a bit of us so and we'll get to your questions you're coming up so please ask fire away there's a bit of a social media flare up that uh that I'm not that I'd ever have one of those but uh that I was I think I actually was part of it this weekend where you know Scott Wapner had this moment with another Canadian guy about why companies shouldn't be able to fail I don't know if you saw that or not or or if you had opinions on on that particular not in particular that you know that moment in terms of the you know the the dialogue back and forth but but why is it important to to have to have companies fail well there's this socialist notion that it's basically taken over the economics profession that we have to protect our economies and our financial institutions from deflation and so the way you do that is you don't let people default on their debt but that doesn't work you know the central banks Keith have been trying for ten years to prevent debt deflation and along comes this external event and both we have this mass evacuation so I think that you know the lesson is let the markets operate you could give this message to the Fed you could give this message many other policy makers because they think they can do it better by coming in and intervening in the marketplace but they can't the the market for resolution in the United States or bankruptcy courts are very important because it's by having a prompt and a timely resolution of insolvency that we get the economy moving again yeah you go to you up and you could have an insolvency that goes off for decade and it kills the economy so it's good look a timely resolution finality in terms of default is very important that's why the framers of the Constitution when a few things they told Congress to do to create federal bankruptcy court yeah of course it's a great it's the great one of the great parts of the American capitalists story free-market capitalism at its core essential yes we and because it puts the the fresh new capital in the hands of new owners or it can take a different look at the business put some energy into the business and more capital and more capital has to do with more energy we bought the you know that that anybody cares about this but we bought the Phoenix Coyotes which are now the Arizona coyotes at a bankruptcy a group that I was part of and that was phenomenal I mean you had a dysfunctional situation that all of a sudden had liquidity and Bank you know now all the sudden yeah we brought it back to life and I'm no longer part of that but I mean just going through that experience at because again there was a lot of debt involved in that situation you know I just I'd hate to see in America I came to the to the u.s. in the mid 90s you know wanting to have a Canadian who just wanted to be like an American a red white and blue free-market capitalist and I just you know that was that was the calling card you know and that's yeah I wonder if that's if people think that that is in jeopardy well I think there's a lot of muddled thinking on the part of Americans were very spoiled we've had our way the dollar is too global currency so we can behave like drunken Argentines and not suffer any immediate consequences but I think down the road we have to realize that the toughness of mind and the discipline that built this country and built all the capital that we benefit from today came about because we were willing to let people fail it's it's it's extremely low look at the airline the airlines are all fighting not to go bankrupt but you know it's kind of pointless creditors own those planes those planes are beyond reach the wall that's left is the gates and a few brands and some intangible assets right the industry is is employment we're we're running at 60 70 % it has to be in the US right now so those routes don't have any value at the moment II think about what's inside of an airline if you take the planes and so what you know it's so much you might as well restructure that yeah that that that industry gets people that topic and Pattillo gets people going alright I'm gonna get into if you don't mind cursing again into some of these questions here you know and and the first actually the highest-rated question has to do with I don't know if you have thoughts on this or not but it has to do with supply chains away from China so well companies in the future will this perpetuate a move away from supply chains in China result in and in result compress corporate profits or raise consumer prices I think the answer is yes both the national security concerns and other concerns have been pushing companies to look for alternatives to China for a long time China had become quite expensive in many respects for her global producers but I think the the Chinese had the capacity to meet the demand and as a Vietnam and other countries increase their ability to take that business away I think they're going to get it and and I you know I'm a student in China I followed the country very closely you don't convinced that we're nearing a point where the end of Chinese communist rule is in sight I know people think this will never happen but I beg to differ I think the people of China want to be free just like everyone else well I think that's a big thing that people missed you know a lot of these apologists I'll just call him for now that says hey nobody could have seen anything good or nobody could see this coming it was just the virus yeah that's I mean China it was started slowing at the end of 2017 with in a secular story that is quite damning on the industrial and manufacturing front so again you know they've tried to stave off recessions or at least stating them as much as technical recessions for quite some time here so you know you have a lot of big issues that were boiling you know in the background that I think that it's it's so lazy and in fact it's reckless to make a statement that nobody could have seen that coming you know if you look at some of the reporting the journal had a great story my friend Lee Miller at China Facebook all of them are focused on the fact that demand had already started to taper off a while ago yeah in terms of Chinese exports and then you throw this into the Mac and you're gonna have the US and Europe in basically telling major sectors of their economies do to start sourcing internally even Mexico even Latin America writ large would be considered a better alternative or Canada for the United States to source new products so I think that's what they're gonna do yeah that's interesting well you know part and parcel with what happened you know in China into the peak don't forget many many mayor not have remembered the capacity build out into the peak-to-peak and commodity price that was a bit of an echo to that 2007 check man it they the state in the Communist Party will do whatever they have to do to keep things stable you grotesque amounts of debt they have more debt than we do they got more debt than anybody I mean know so at a certain point the whole thing is gonna implode on itself we just have to be prepared for that eventuality yeah well well what I was gonna try to get I agree that I mean what you what you get out of that is these boom-bust cycles you know they again the Chinese perpetuated Bernanke devalues the dollar to a 40-year low and 2011 commodities at all-time highs gold it's prior all-time highs that was that created an imbalance of supplies you know so now you got the the washout in the energy space and this is actually one of the second highest voted question it actually surprises me maybe it shouldn't because you are you're gonna have an opinion on this but you know looking at the followed for example like midstream energy so the question is implying that that is actually finally undervalued or maybe a place to go from from a long-term infrastructure asset investment perspective do you agree with that or no I think you would have to be very very careful that so you know it's funny um exploration tends to be funded with equity as you go up the production chain towards distribution you can get more debt and leverage involved in typically bank loans to come in there and buy this though you're going to have to have a really strong Constitution I think because I can't tell you what's going to happen with demand in the near term I like transportation I own Williams but I I guess I would say to you this you know between conservation and between what I think is going to be an l-shape recovery in terms of GDP and overall to man I don't know if we're going to fix oil demand anytime soon you know there's just so many people out there that are dependent upon oil to fund their countries and their governmental structures like the Saudis and the Russians they can't back off where are they going to go now you know they're a one-trick pony in Russia they're basically a big commodity Bruce or with nuclear weapons okay but you know they have an economy that's smaller than New York State you know I don't worry about the Russians I I think that we have to worry about the fact that you know we have in the u.s. pretty much taking care of our energy needs I think at some point we are going to fulfill the vision of Marconi and electrify the whole country when we figure out to do it how to do it without lithium batteries and that's good I think the u.s. is going to lead the world in that in that sense but you know the rest of the world the third world is commodity dependent I don't know what happens with that Keith I really don't know it's a and in dollars you know that's an important point it's in dollars the whole world is short yeah well so if you go back and look and a lot of people still don't quite know the difference between now and no a time like it's absolutely not like away at this time in o8 when the Fed was panicking and the government was panicking across the board oil went 250 bucks I mean it's like these are these aren't even remotely close and I wonder I mean it's just kind of interesting too I mean it's the one one of the few things the Fed other than just stocks hasn't started to buy so it of course is allowed to crash properly by Stephanie's metaphor right you know the US has a private bond market that's the thing that differentiates us from the rest of the world so I'm not worried about equity please come back all on their own I can guarantee you one thing Jake Howell doesn't worry about when it goes to bed at night is accurate because that is the most liquid hedge for inflation that investors have yeah real estate is also a good one but when too many people chase it and it becomes grotesquely overvalued as it has been you know that that you know causes problems but to me you know as long as the bond market comes back as long as we get credit spreads and particularly high yield spreads back down you want to see high yield below 500 basis points over the curve then we can get the party started again yeah hey look people donut people don't quite know what what the pre-party looks like on pre-packing bankruptcies though because how do you have a party if you don't pre if you don't have a pre-party I mean I'm Canadian I know exactly what the answer that is so you can yeah but there was some ugly leverage you saw some banks butene collateral over the past couple of weeks and the reason and that was all these swaps that were put on between non risk collateral on one side and basically crap on the other we've seen this movie before and so it was all inside the banks you couldn't see it because these were is the swaps but they were out of the money the margin calls were made and not met and so they had to they have to shut it down yeah now a couple questions have moved up in the queue here in terms of their rank and I think it's because of what you said obviously but you know if that is your view on China and we've we have a different or a new normal developing in America from from an internal capacity perspective like is it do you see inflation coming for real not a new term I think deflation was still the problem yeah the there are a lot of different views on that I guess you people are so wed to the lessons of history they just want to like tape this period in time to that time so remember the key the key flaw and the pickety analysis in capital was that he didn't realize the data series change over time and a big you know factor that has changed his demographics the population is not behaving the way it used to when I was young and my parents were making babies and buying houses in Washington you had demand consumer demand type inflation and you had had labor inflation too but today now we have the surf it of late right I mean well I mean the the demand shocked is what it is but this question to really gets to the other side of that question which is why not deflation Christian is asking is the world going to emulate Japan experiencing the slow asset price declines as a result of corporates deleveraging decline credit availability no global engines of growth etc no that's a bit too dystopian for me I I think what you're gonna see is the reset NASA prices the righteous who have cash are gonna come in and buy these assets and and prosper as a result and you know we're just gonna have to work our way back to something a little bit more national and regional and much less globalized so I think globalization is done is you know you're gonna have commerce between nations and travel but I think the nature of that is to be very different than you saw previously and the cost of travel is going to be much higher so you know to me I I think that it's always good to let people benefit it's always good to let savers come in and buy assets cheap and the central bankers have refused to do this why because all of the public issuers all the countries are over indebted and so they're afraid that the whole structure falls apart you know in the post-war world we put government at the top of the pyramid which is a mistake but that's the way it is and the whole dollar system is based on the Treasury and the government insured mortgage market as the foundation so you know that that's all we're gonna have left through the tongue being you're gonna high-grade corporates you're gonna government-insured mortgage paper a couple of things here in the air but it's not going to be a lot of liquidity for assets but that's an opportunity for the like I say the right you know the meek shall inherit the earth right and especially if they've got some cash yeah well I mean particularly given your points to on on the banking systems liquidity reserves stuff like that I mean is there is there an actual this is one question I don't know if you made a made a star of yourself on this but I think it was due to some real real vision interview that you had I love real vision if Chris if he said Chris I loved your interviews on real vision if you had to go all in and one banking stock going forward what would the bet be I didn't know that you're going all-in in banking stocks but I don't make five so recommendations because I'm an investment banker but I could tell you what I own I own US Bank common and preferred okay I own city Trump's which I loved the nine and three quarters of 40 I own Bank America preferreds and boring stuff like that I I have ten dedo anionic video and when it's sold off I went and bought a full load so you know like we're following stuff down very much because it's very boring I gave the rest of my money to my wife who saw a private banker and they've been getting slaughtered because they had a lot of equity exposure but I pointed her - good luck but I thank my stars I got out of the reach in 2018 and what I would tell you is don't shopping look for value you want to buy strength right now you don't want to go reaching for the outliers because let's face it Capital One City Goldman Sachs they're cheap for a reason you know and their kicks of the first to its credit risk in the case of Goldman it's really operational risk in this huge question mark that we can never resolve right you don't know what's going on there and they are not very good at articulating what the plan is going forward City has the same problem so you know I love us Bank because they're the best performer in the top five they have a great funding base and and they're gonna do fine they make enough money that they don't even think about touching your their dividend they don't have to they people working well so you don't have to think about this you know Bank America mediocre performer in terms of asset returns but my god you know Brian is be risk the bank so much that they're not really that exposed they're gonna take consumer defaults but they don't have a huge capital markets focus even with Merrill Lynch well you just ring-fenced a bunch of the final questions there where we're at the 45 minute market here Chris so thank you thank you so much for your time I mean you could we can go anywhere with you and that's why we always yeah well I appreciate it thank you you can find Chris Whelan on Twitter he's quite active obviously quite knowledgeable as well up next we have one of my favorites you don't I don't think you know this guy yet but his name is Mike Taylor Mike T looking forward to that discussion in about 15 minutes [Music] you

Channel: Hedgeye

Views: 12,009

Rating: 4.8461537 out of 5

Keywords: finance, wall street, markets, stocks, trading, macroeconomics, hedgeye, keith mccullough, bloomberg, options, day, chris whalen

Id: 6GFi0P9gUxg

Length: 45min 18sec (2718 seconds)

Published: Wed Apr 29 2020