Washington, DC -- (ReleaseWire) -- 11/17/2016 --DAWN BENNETT: Chris Whalen is a senior managing director and head of research at Kroll Bond Rating Agency, and over the past three decades he's worked for such financial firms as Bear Stearns, Prudential Security and Tangent Capital Partners. He's also a writer. His first book was published in 2010. Its title was Inflated: How Money and Debt Built the American Dream. And then in 2014 Financial Stability: Confidence and the Wealth of Nations. All this experience in the financial markets makes Chris the perfect guest on Financial Myth Busting this week as we game out what Trump's surprising victory means for the markets through the end of the year and how Trump's views on monetary policy will impact the larger global economy. Chris, welcome to Financial Myth Busting.
CHRIS WHALEN: Hey. Hello, Dawn. I've got another book coming out in the new year, probably January, on Ford. It's called Ford Man. It's the study of the company and the family and their interesting interactions over the century.
BENNETT: Great. Well, with the election over and Trump somehow set to take over the White House come January, all eyes are now looking toward the Federal Reserve which notably avoided raising rates before the Election Day? I think the expectation is that Yellen now has no reasons not to raise rates come December. I don't think Trump was her choice so there's no personal reason and there's no political reason. Do you agree she's likely to raise rates and do you expect doing so this is going to elicit a difficult stock market or recession or any type of other economic fallout?
WHALEN: Well, I think first and foremost you've got to look at the bond market. What the bond market tells you that since June when yield for the 10-year really reached their lows, yields have almost doubled. So the 10-year is headed to about 2.2 percent. I think it's going to go higher. And that has to catch up with the market, Dawn, it's what it comes down to. Mortgage rates are going up and bondage and linkage are coming back.
BENNETT: A piece of data that I saw last week was that the bond market worldwide after Trump was elected lost close to 300 billion in value. Does that sound about right?
WHALEN: Well, sure. You know, yields are going up and prices are going down. We had almost 10 years of kind of managed stability care of the central banks and now I think that people are looking at Trump's spending program, cutting taxes, various other things and also I think the fact that politically the Fed cannot continue to monetize debt the way it was during quantitative easing when they were buying bonds and they basically got to hold them to maturity. I think that all of that is now putting the market back into the hands of investors who have been on the sidelines in terms of the direction of interest rates for years. I think you're right. They are going to have to raise rates just to catch up with where the market is.
BENNETT: I think we're in a pickle. President-elect Trump has to contend also with Obama's massive debt burden that has built up over the last 8 years. But he has to do it at a time when we are at this epic point of accommodative monetary policy. There's just no room for him to continue that, I believe. We talked about unlimited amounts of Treasuries bough in the past by our Federal Reserve which at the same time has suppressed the impact of Obama's federal debt balance. What's going to happen? What do you honestly think is going to happen when rates go up?
WHALEN: Well, you know, the equity markets for the past few years have been substituting debt for equity and I think you're going to see a lot of big corporate issuers slowly let that debt run off and they're going to have to issue more stock. Now, the markets are hungry for stock. You haven't had much in the way of quality issuance going back to the crisis. However, it's going to put pressure on stock prices simply because IBM and many, many other big industrial companies—even companies like Apple, for example—were out buying back shares and issuing debt. That's going to reverse itself. And I don't see that as a catastrophe. A number of analysts are predicting the end of the world. I'm not an 'end of the world' kind of guy. I think we need conservative values and practical solutions for investors, right? How do we survive today? So I think you've got to just be cognizant of the fact that bond yields are going to go up, The pricing on your portfolio may suffer as a result but hopefully you can sit with it, and at the same time I think you're going to see a lot of companies desperately trying to rebalance their balance sheets in terms of the debt/equity mix. It got very lopsided over the last few years.
BENNETT: American investors have a very short-term point of view about many things. So when you say 'sit with it,' if Trump does this correctly it's not going to take just 30 days or 60 days or the first quarter of 2017.
WHALEN: Oh, no.
BENNETT: So let's be realistic to our listeners. I think it's going to be more like a year or two. Or more.
WHALEN: Look, I'm a credit guy, Dawn. So when I buy a bond or when I look at a bond I think 'Do I like the credit? Would I be willing to hold it to maturity?' Now, the good news is I think, for a lot of investors who've been punished by the central banks over the last few years, in terms of artificially low yields, they're going to have an opportunity to start getting more carry in their portfolios, more income. And that's great. I also think that a lot of equity issuers are the same way. They're going to have to offer investors more. You know, you pointed it out perfectly. There isn't a lot of room for the federal government to expand spending. They can cut taxes and all the rest of the things that Trump has said. Can you get higher growth? Yeah, on the margins. But really the big constraint on growth in the United States is that the population has grown at half to 1 percent versus 2 percent after World War II. You know, we have a relatively slow growing economy and you see that all over the world. You see that in Europe, you see that in China. So the real constraint on growth is not taxes or spending. Public sector spending doesn't help a lot. We know that. But it's really the fact that you don't have huge amounts of growth in population which is what really drives wealth. If you look at it over the long term, GDP and population growth – those are the two main factors behind real wealth creation after inflation.
BENNETT: The Congressional budget office came out with a forecast and I'm wondering if you think this is accurate. We're talking about rising interest rates, increasing yields, and what they said was that the outlays for the interest payments on public debt alone right now could rise over 300 billion over the next 8 years which would be more than a 50 percent increase in the current budget deficit. I'm wondering how can Trump handle that. How can our economy handle that? Is there a policy out there that can accommodate that?
WHALEN: Well, sad to say I think we already know the answer to that question which is that if the U.S. Treasury gets into trouble in terms of being able to issue new debt and fund the deficits then the central bank will buy it. We already crossed that Rubicon and I think politically that's going to be very difficult because Republicans in Congress don't like it. They're adamantly opposed to that. But you're right. We had a free ride since 2008. The central banks have taken the politicians off the hook and you've seen a huge expansion in debt, not just in the U.S. but in Europe and in Asia. It's been a party. The low rates were supposed to help to manage the existing problem and instead most of the governments in Europe, for example, doubled down and they borrowed more to maintain current consumption levels. So I think there's a global problem here and what we've seen is that the central bankers have been willing to monetize that debt and essentially take it out of the market and punish savers at the same time by driving rates down. So I think that is your solution, Dawn, and I think they'll do it again.
BENNETT: With headwinds already baked in to the federal budget from ballooning debt, which we talked about, and entitlement spending, how is Trump actually going to deliver on some of his promises like tax cuts and infrastructure projects? I know you're also forecasting some kind of major tax and spending reform package. What's your feeling on that?
WHALEN: I think in the near term the easy stuff, as we wrote last week, is going to be regulatory reform. I think you could see some changes specific to the mortgage industry and the banking industry. If Jeb Hensarling, the chairman of the House Financial Services Committee taxes the Affordable Care Act, those are more difficult equations. You know, it's going to take a lot more time and a lot more negotiation with members of both parties on the Hill before you can get those things done. Lots of heavy lifting.
BENNETT: Do you think that he's going to be able to herd the Hill? Trump isn't a politician and people either like him or they loathe him. There's no in-between. Do you think he has that ability to bring everybody together?
WHALEN: I think Donald Trump is very astute. I mean, if you look at the way he managed the campaign and the way he managed the media even though 90 percent of them were against him. That's how he won. You know, I think he understands the modern media world very well and if he can continue to use that sounding board as kind of a counterpoint to the discussions in Washington I think he'll have some success. But let's face it. Washington is a dysfunctional city. And as we wrote last week, in the perfect world, sure, you'd get all these things done in the first six months. Generally, in Washington, Congress can only handle one major piece of legislation a year, so he's going to have to pick which fights he wants to have first.
BENNETT: Do you believe one of his first priorities will be passing a law loosening financial regulation, then? It's just destroyed our industry. He has said he's just going to throw Dodd-Frank completely away. What do you think he'll do and why do you think this is such a high priority for him?
WHALEN: Well, I think passing Hensarling's Financial Choice Act would be a good move because it would make the economy more receptive if in fact you cut taxes and try and have more spending on the infrastructure, for example.
BENNETT: So it's a smart first step.
WHALEN: Yeah, and it's relatively easy. It would have enormous support from a lot of different constituencies – the housing sector, the banks, small and large, by the way – there's a lot of relief in there for community banks and regional banks which is long overdue. And I think in big picture terms what we're talking about is changing the atmosphere of punishment and punitive regulation into something a little more balanced. It would turn the Consumer Finance Protection Bureau into an agency, like the other independent agencies in Washington, and it would no longer be run by one very angry liberal Richard Cordray who I think is going to go off and try to run for governor in Ohio, believe it or not. I think Americans want growth and they want relief, especially small and medium-sized businesses. They do not want to be punished anymore. And that was a big mistake, I think, of both President Obama and Hillary Clinton thinking that this punitive Spanish Inquisition type of regime was actually politically popular. It's not. It's funny how politics is.
BENNETT: It is. Talking about U.S. companies, the Bureau of Labor statistics released last week that the American economy under Obama only created 220,000 new companies in the United States and that's down from 246,000 created in 2015. That's the biggest collapse in the creation of new companies in American history. Do you think Trump is going to be able to turn that type of statistic around?
WHALEN: Well, politicians don't create companies and they don't create growth but they can put in place environments that are either encouraging or discouraging to private sector activity and I think Trump will definitely be much more of a positive influence on the private sector. You know, it's really difficult for people to understand just how bad things have been, for example, in housing and in the mortgage lending, mortgage servicing business under Dodd-Frank. It's been quite abysmal even though we're going to have a good year this year. Now, interestingly, because interest rates are going up, you will probably see refinance activity in the mortgage market trail off. It will slow down.
BENNETT: You don't think they're going to use the last month and a half here in 2016?
WHALEN: Well, they'll try but spreads have already moved. You know, before the election, mortgage companies were selling their paper into Fannie and Freddie 3 percent coupons. Now we're closer to 3½. So, mortgage rates have gone up about a half a point if you look at the execution that a mortgage company gets when they sell a loan to Fannie Mae or Freddie Mac.
BENNETT: Chris, mentioning Ginnie Mae and Fannie Mae and Freddie Mac—another major issue you said Washington is ignoring at its own peril is the massive growth of Ginnie Mae which, of course, is another government-supported enterprise that most Americans don't even know about. I want explore what Ginnie Mae is for our listeners, and why the issue is going to get so critical.
WHALEN: Yeah, it is. I mean, Ginnie Mae has the full faith and credit of the United States, unlike Fannie Mae and Freddie Mac, and it has become the only real market for below prime mortgages. So you have a lot of mortgage firms that have a customer with a 620 or 600 FICO, and they sell the loans to the FHA and the taxpayer is on the hook in the event of default. The market is growing very rapidly. It's at about $1.6 trillion now and it's going to be over $2 trillion by the middle of next year. My friend Ted Tozer is the president of Ginnie Mae. He's an extraordinary public servant and he's probably going to be leaving, Dawn, so we need to find somebody who understands the mortgage market to take his place. I would say, both for myself and for everybody in the industry, we're very concerned about that because Ted's been there for 7 years and he doesn't control policy. He runs the place and it's the second most important bond market in the world after the U.S. Treasury market.
BENNETT: But it's a complicated market too. These are complicated structured products. Yes?
WHALEN: Well, yes and no. As an investor you see the prepayments. If somebody refinances their mortgage you're going to get less interest and you're going to get a principal repayment back. So that makes them different than a normal bond. But other than that it's a high quality security and they're very popular with investors.
BENNETT: Yes. And even in the low interest rate environment they've been very popular. And writing about the presidential election, you noted that neither candidate spent any time discussing the dangers posed by the slow motion disintegration of the European Union that we're currently witnessing. If you could talk to that, why is it so important for America to focus on? And also my understanding is they're not a fan of Trump so I don't know if he's going to help them or not. What do you think?
WHALEN: Look, Barack Obama and Hilary Clinton started the process of disintegration to really accelerate the war in Syria, this extraordinarily ill-advised campaign to remove Hafez al-Assad. So you have the Israelis, the Saudis, the French, the U.S. all behind what is essentially ISIS fighting Mr. Assad. And then you have the Russians, the Iranians and a number of other countries effectively protecting the population and the Assad government. So it's a mess. All of the refuges went to Europe creating this crisis and I think largely propelling the Brexit vote in the UK. And you have a vote in Italy coming up before the end of the year. I think again the anti-government forces are going to win so the momentum created by our adventure in the Middle East is accelerating the process. It was probably already going to happen anyway but I think the EU is in desperate trouble. I think we may not have EU in a couple of years as it exists today.
BENNETT: Do you think that it's going to disintegrate one country at a time, as with Britain and now Italy and maybe Portugal, or do you think it's just going to go all at once?
WHALEN: No, I think what will happen is that the countries or southern Europe, which tend to have higher inflation rates, and don't really want to live like Germans, are going to be forced out, including Italy. These are countries where they've lost the ability to compete because they're locked in the Eurozone. The main beneficiary of the euro, Dawn, is the Germans. They get a slightly cheaper currency and it helps their export. Even the Dutch, frankly, because of immigration, not because of inflation or economic issues, but because of the immigration issues, they may get out as well.
BENNETT: If Trump were to call Chris Whalen for advice on where to focus his energy to get things back on track as quickly as possible, what advice would you give him? Go.
WHALEN: Fix the regulation in the mortgage market. Same thing with the banking industry. We're not creating enough credit. And I think also look selectively at taxes, both corporate taxes and individual taxes. There are things that can be done there to help growth and job creation.
BENNETT: And, Chris, please remind us of the title of your book and when do you think it's going to come out?
WHALEN: The new book is called Ford Man: From Inspiration to Enterprise. And it should be out January timeframe, at least up on Amazon. It's really my first book and it didn't have a happy ending at the time. I finished it about 11 years ago when Ford was just going into a restructuring process. And now Bill Ford has done a good job of turning things around and I thought he deserved a victory lap.
BENNETT: Oh, good. Have you given him pages of the book to endorse?
WHALEN: No, I did not cooperate with the company. I felt using public sources was better. Most of the Ford books have been published with the active cooperation and oversight of the Ford PR department and I wanted to remain independent.
BENNETT: Good for you. That was Chris Whalen. Thanks, Chris.
For over a quarter century, Dawn Bennett has been successfully guiding clients through the complexities of wealth management. Her unique vision and insight into market trends makes Bennett a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to her highly regarded weekly talk radio program - Financial Mythbusting. Through prudent and thoughtful advice, Dawn Bennett has strived to consistently provide the highest quality of guidance.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett.