Financial Markets on Edge: Inflation, Tariffs, and the Fed’s Dilemma

The rally in financials is gaining momentum.

This comes ahead of earnings season and on the heels of the Fed Reserve's stress test.

Now banks are expected to boost share buybacks, but the outlook does remain complex, and Trump's handling of the Fed, as well as the dollar could trigger market turmoil, especially if spending keeps the economy running hot and fuels inflation.

Of course, all eyes are on the political changes in DC and higher valuations.

So which consumer focused stocks will thrive as rates come down.

And loan volumes increase.

Well joining me here at the New York Stock Exchange is Chris Whalen, chairman of Whaling Global Advisors.

So Chris, welcome.

Thank you so much for joining me.

So first and foremost, I know that you focus on debt.

So tell me about money, debt, and the American dream.

What is happening there?

Well, we have lots of debt, but you know, looking at the market, you'd think we don't have enough because every time the treasury get up anywhere close to 5%, the 10 year, it trades right back down.

We still don't have a consumer recession.

We have a bit of a mess in commercial real estate and credit.

You've heard about private equity, of course, but the consumer is still relatively intact.

The bottom quartile, if you will, the last 25%, is hurting, but that's been the case for years.

The rest is fine.

If you look at the banks, it is no default activity in credit cards, mortgages, whatever.

And I know you have very strong opinions about debt as well as the financials here.

So first and foremost, we're seeing record highs for the major US stock averages.

We saw the S&P 500, Nasdaq hit record highs, and coming in this morning we saw crypto major Bitcoin clear 118,000.

Right, so that is significant, but when we're talking about money, debt, the American dream, what is happening to the American dream and what does all of this affect that dream?

Well, the American dream is under attack because of inflation, because Washington cannot deal with the budget deficit.

It flows through.

So every time the market gets into a problem like March 2020 and the Fed has to ride to the rescue, the inflation flows through the banks.

The banking system expanded enormously.

So that's really the issue, I think.

Until we get the budget deficit under control, consumers are going to suffer with inflation, and it's a political problem.

You can see we're about to elect a Marxist Leninist here in New York City.

You know, funny as that may seem, right, but people are hurting.

They can't make ends meet.

I think we should be relocating people out of New York City because they can't afford to live here.

Yeah, and we know when it comes to the cost of living, we have seen that entire.

And there's so many reasons for this, and many American consumers may be asking when our prices actually going to be coming down, but as we mentioned, the nation's capital, Washington DC, we get inflation figures out next week.

And between politics, between the Oval Office and the Federal Reserve, there's a lot going on.

So what do you think needs to happen?

I think the Fed should have cut rates last year when they had a chance, but it's interesting.

Governor Waller was out today saying they're going to continue shrinking the balance sheet.

That's contractionary.

So if even if they cut Fed funds next month, if they continue to shrink the balance sheet for the rest of the year, I think that's a net negative for the economy.

You know, we published an index on the top 100 banks.

They're outperforming Bitcoin by a considerable margin.

Why inflation.

You know, the stock market continues to be the best inflation heads you can get, and unfortunately I think it's going to go higher, which means that inflation is probably headed higher this year.

Yeah, and I can't believe I haven't asked you yet, but regarding tariffs, there's still tariff uncertainties, but here we are.

We're looking at the key levels for the S&P 500 after clearing record highs.

So with everything happening with tariffs, this uncertainty.

How will this play out and how will it really affect inflation, Chris?

I don't think the Fed should be paying attention to tariffs at all.

Tariffs are a fiscal issue.

If they do in fact result in inflation, let's wait till we see the numbers, but all of this pontification and this and that that we hear from Fed governors when they're out in the media, they don't know anything.

There's been a couple who've actually said that.

They said there is no business. effect yet.

I think it was Mualem who said that yesterday.

So to me, let's wait for it because I don't think the impact of tariffs is clear at all.

The Fed is taking their eye off the ball.

Why commercial?

The big, big question mark for banks, nonbanks.

I don't care.

Blackstone is about commercial credit right now.

I think the Fed was way late.

You know, President Trump is right.

They should have cut earlier.

And we can have an entire hour-long discussion on policy, but you mentioned the difference between fiscal, monetary, and also economics.

So why does it matter to understand the differences between all of these different types of policies?

Monetary policy has no impact on fiscal policy.

The two are totally different realms.

You could argue that fiscal policy needs to improve in this country, but that's not the Fed's. they need to focus on what they control.

They hope they control the short end of the market.

They don't control the 10 year and the 30 year, and I think it was very interesting that Scott Besant, the Treasury Secretary, has now said he's going to focus on issuing T bills, which is what Janet Yellen was saying, right?

So in a sense, nothing's changed.

We are increasingly constrained in the United States, and yet none of our political leaders want to admit it.

Eventually they will, and you know when we're talking about the changing of the guards in the federal reserve, one area that I do want to ask you about is the FX market and currency, in particular the US dollar.

So here we are, of course, we're looking at outperformance in terms of the equity averages outside of the US, but what about the US dollar and the role that it plays?

What do you expect to see for the currency?

Well, the dollar.

It is pretty close to the lows for Trump won, I think the weak dollar is actually helping stocks right now.

When the dollar falls by a certain percentage, you're going to see speculative capital flows come back in, and I think that's one reason why we've been hitting all-time highs.

Will the dollar weaken further?

I think it will.

You're probably going to see a rally in the near term, but you know, next year, for example, if they don't do anything about the budget deficit, then the Treasury.

Out there borrowing 3 to $4 trillion then I think the dollar is going to go lower.

I've been telling my readers gold, yeah, yep, and gold.

So earlier this year we saw gold skyrocket to new record highs.

It is something that we're watching.

Commodities overall we're continuing to keep our eyes on.

But between the gold, the US currency, and of course we have earnings season coming up with the financials reporting next week to kick off the official season.

What matters?

I think gold is a long term trade.

I think with financials, as long as credit doesn't get particularly ugly, they're going to continue to perform.

Why?

Because managers want to own them.

The earnings aren't great, and the thing that worries me, Remy, is that the loan yields and also deposit yields are falling.

That means that there's no demand for credit.

So when you're Jay Powell's seat, what should you be worried about, right?

You should be worried about deflation right now, and I think that's a problem for the street.

When I see that Jamie Dimon wants to return more capital because he can't use it in his business, I worry about that.

Yeah, yeah.

And finally, before I let you go, I want to ask you one last question here.

So the Fed Reserve stress test came and went, and of course in terms of headline news we saw that the focus was on buybacks, but what are you focusing on and why?

The stress tests to me are really interesting because you want to look at the stress number for each bank that tells you what the Fed's worried about.

Of course people want to buy back more stock because they don't need it.

That's the, you see that across the industry, but I think that ultimately the banks are going to be a reasonably good play.

They're going to return a lot of capital. dividends are going to go up for a while.

They're going to return to where they were before the Biden administration.

And then after that, I think they're going to have to come down because credit is going to be an increasing issue next year.

OK, Chris, well, we will have to leave it there, but great to have you on the show and look forward to speaking with you again.

Thank you so much.