Chris Whalen: Why We Could See Double-Digit Inflation, Rationing, & Fed Hikes

Added: 2026-05-23

[00:00:00]I do think you're going to see a rather significant change in the direction of the discussion coming from the Fed because they have to get in front of this. You know, if you believe that raising rates is going to do anything to help inflation, then you got to do it now. If you're the Fed chair and you have a consensus on the committee to raise rates to fight inflation, if you cause the economy to slow down as a result, eventually the politics are going to force you to cut.

[00:00:37]Hey everyone, welcome back to this week's episode of The Rap with Chris Whan where we break down what's happening on Wall Street, Washington DC, and everywhere in between. Chris, great to see you.

[00:00:47]>> Hey, nice to see you, Julia. Exciting week.

[00:00:52]>> Exciting week. Oh, headed into a long weekend here, but Chris, you just dropped the latest edition of the rap.

[00:00:58]inflation sings GOP city and Black Rockck double down on private credit.

[00:01:04]>> Let's get into it because you talk about at the top of the rap this morning around inflation, our conversation from last week and how that situation that's still unfolding in Iran is sinking the GOP's hopes for the midterms. Um, since we do cover DC here, how do you see the politics around energy prices and as you talked about last week, possible rationing playing out between now and November? Because we've talked about the midterms are critical this year.

[00:01:35]>> Yeah, very much. I mean, uh, President Trump is pushing very hard to get a deal with Iran. Uh, the Israelis, on the other hand, want to go back to war. Uh both the Saudis and the Israelis wanted the US to totally destroy Iran's war making capability. So the president's got a a tough situation. And meanwhile, our friend John Daard, who I've spoken to a couple times this week, is predicting that we're going to have to see rationing in the United States specifically for very intensive uh types of products. Like imagine the kind of lubricants you need for gas turbines.

[00:02:12]they cannot use inferior products. So, we're going to have to start to prioritize those sorts of uses and that means that other uses are going to be uh pushed down the list in terms of priority. Nobody in Washington wants to talk about this. I've asked a question and you know, you get people kind of staring at you like you're a bad person.

[00:02:34]Uh but the reality is is that I do think we are going to see rationing because the longer we have this situation in the Gulf, the longer the straight of Hormuz is closed, that means that vital uh products are not reaching uh countries all around the world. It's not just the US. Uh you may notice for example in Europe they have changed the criteria for uh jet fuel. they're now willing to use US uh type product instead of the more green version that the airlines in Europe were forced to use. So I think you're going to see a lot of changes coming down the pike as a result of this war and nobody wants to talk about it.

[00:03:13]So um you know eventually they will be forced to uh but right now nobody in the White House even wants to respond to questions about this. Well, they might not want to talk about it, but we're having the conversation, Chris. And one of the things you said last week that I want to revisit with you is that you said we could hit double digit inflation by year end.

[00:03:35]>> Yes.

[00:03:36]>> Can you walk us through that thesis because I imagine it ties back to a lot of these critical components like around lubricants and fuels and all of these things that are so essential to the economy. Walk us through the thesis, the thought process, double digit inflation.

[00:03:51]Well, when you look at how much prices have already risen for things like gasoline and diesel and then you look in in terms of the the grocery aisle and other areas, there are many many products that are touched by this war and I think that over time you're going to see prices continue to move higher.

[00:04:13]So, yeah, I do think you could see a double-digit uh inflation print this year. And what's interesting is that the narrative around the Fed and Kevin Worish and the rest of it has totally changed. You still had people trying to make the case that we could see a rate cut this year. Uh and we talked about our friend Diane Swank uh at KPMG saying, "No, no, we're going to have a rate hike uh perhaps as early as July."

[00:04:38]And I think that's right. uh the FOMC clearly wanted to take the language about a possible cut out of the last statement and uh they didn't they didn't have sufficient votes but I do think you're going to see a rather significant change in the direction of the discussion coming from the Fed because they have to get in front of this you know if you believe that raising rates is going to do anything to help inflation then you got to do it now but you know the thing is is as we've discussed before Julia these are all external factors that are influencing inflation right now. So if you're the Fed chair and you have a consensus on the committee to raise rates to fight inflation, if you cause the economy to slow down as a result, eventually the politics are going to force you to cut, right? But what's interesting, a little thing I'm going to work on next week that we can talk about uh in the next version of the rap is that imagine where real gas prices are. If you actually discount the price of gasoline for inflation over the past 10, 15 years, gas prices are actually really low. Even though they're up, you know, dramatically from where they were in January, they're still in relative real inflation adjusted terms much lower than they were a decade ago.

[00:05:58]>> Really? How like, okay, I know you're gonna get into the next thing, but give us a sneak peek how >> just because how much purchasing power the dollar has lost in the past 15 years since the great financial crisis. Then you think about that nominal price of gas, >> $4, right, for for regular a little over $4.

[00:06:20]>> That's a lot lower in real terms than it was 10 years ago.

[00:06:26]So, you know, we we don't often think of inflation adjusted terms. We normally just think of nominal prices. We see a price and we figure that's the price, right? But in a society that's struggling with affordability and inflation, people are going to start to become sensitized to distinctions like this. And I do think it's one of the reasons the US economy is still growing is that energy prices, even though they're up a lot, over $100 for a barrel of oil, right? They're still in relative dollar terms lower than where they were years ago.

[00:07:01]>> Such an interesting point, Chris.

[00:07:04]Circling back though, if we get doubledigit inflation, how do you see the knock-on effects of that? Because we still have people, many, many people who feel inflation today.

[00:07:20]So, how do you see that one playing out?

[00:07:22]What are the consequences?

[00:07:24]>> Well, the politics of affordability are going to, I think, reshape the US landscape. Uh, I think the Republicans are in danger of losing both the House and the Senate. Uh, President Trump is continuing to come up with reasons for the Senate to run away from him before the midterm election. you know, this nonsense of creating a fund for uh you know, his supporters who were persecuted during the Biden administration, which was true, by the way. They were persecuted and they did have huge costs as a result uh from all of the uh the litigation that ensued. Uh and then we have this nonsense with a a deal with the Department of Justice where the Trump family is going to have blanket immunity going forward. I don't think that's going to work. next president is going to immediately reverse that decision. So, you know, there's a lot of friction here because of affordability, Julia. And I think that's really going to play a decisive role in the midterm elections. It it's going to be rather dramatic, I think, because on the other hand, you know, people still don't care for the Democrats. The Democrats have still not come up with a formula that most voters want to support and their candidates are are just awful. So, you know, you have a situation where we don't have any really good choices at the moment.

[00:08:45]>> Oh, yes. And then going back to the Federal Reserve, as you point out, Diane Swank thinks that we could have at least one rate hike this year, as early as July, how big of a shift is this in the Fed's thinking here?

[00:09:01]>> Well, I think the ground has shifted underneath all of us. Um the the Fed has been forced to acknowledge the inflation coming out of this war and now they have to retool and come up with a a new policy narrative to fit. You know, it's unfortunate for Kevin Wars. He wanted to talk about other things. Uh but I think his immediate task is going to be addressing inflation and positioning the central bank so that they are credible because you know when you see the 10-year Treasury above 4 and a half and the 30 years and heading into the fives that tells you that inflation is really the the chief concern of the markets today. You have the normal doom and gloom about people selling treasuries and the end of the dollar, but I don't think that's really a realistic uh concern at this point. It's mostly just noise.

[00:09:53]>> I guess the last time around when we had the inflation surge, I mean, asset holders benefited, too.

[00:10:01]So, do you think it'll be different this time?

[00:10:04]>> Well, yes, asset holders benefit. Um, you know, it was funny. People were asking me about the lock-in effect of having interest rates go up. And a lot of people out there with low coupon mortgages don't want to sell, but they also have enormous gains in their houses. So, at some point, they're going to look at a 50 or 60% gain in the value of their house, the nominal value, and they'll sell, right? So, I think yes, asset holders, people who own stocks and bonds are going to benefit somewhat. But I think you got to remember that when inflation moves this much this fast uh in a short period of time, uh you're not necessarily going to get a hedge from stocks and other uh investment assets that's uh nearly uh the same as the inflation hit that you're taking. You know, for example, gold and silver, even though the inflation numbers are up, been going sideways really for the past few weeks. I think this is partly just because the markets don't know what to do and also there have been some big sellers out there particularly in the Middle East because the damage that's occurred to many of these economies is going to force them to change their spending patterns force them to liquidate assets to raise cash. Uh look at the Saudis for example. uh even though oil prices are up, they have taken some significant losses because of these attacks by Iran and they have to rebuild their industry. Same thing with the other Gulf states. Uh it's interesting, we had a couple ships that actually went through the straight of Hormuz today carrying oil for China, but most shipments are not moving, Julia, and that's really bad for the global economy.

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[00:12:51]You were just talking about how gold and silver have been behaving of late, but does a thesis around the potential for double digit inflation ahead. Does that reinforce how you're looking at wanting to be allocated to gold and silver in your portfolio? Has it changed anything for you? No, I'm still happy with the long gold piece as an inflation hedge and I think also as part of the rebalancing we've seen from global central banks. They want to hold things other than dollars. They're still going to use the dollar because it's the biggest currency and it's also the really the only global currency you can use for financing. And then silver is different. Uh silver is I think a a play on the shortage of the metal on the one hand and the growing demand for the metal in in technology. That to me is the most striking thing about silver.

[00:13:43]It's a commercial play and other commodities as well. So no, I like my long commodity, long high yielding fiat uh barbell. I'm going to write about that this week now that things have settled down a little bit after our move. I'm sitting in my new office, by the way, so it's all good.

[00:14:01]I love it. I love it. Um, we're both in our Florida bureaus today. Um, Chris, in the institutional risk analyst this week, you did write about uh Kevin Walsh, not the RAP, but in the IRA, Kevin Walsh, and how he could shrink the Fed's balance sheet while credibly cutting short-term rates. But I just wanted to um clarify uh given where we are now, has that been changed like with now the Fed talking about possible hikes because of the war driven inflation? Does that change Wars' game plan or the options he has going in?

[00:14:35]>> No, I don't think so. And and you know that we we have a whole culture that goes back decades, Julia, of economists and other policy makers, people in the markets fixating on the guidance that we get for the target for the short-term uh Fed funds rate. But the reality is is that it's long-term interest rates, the 10 and the 30s that really impact the global economy. The short-term rate suggestions from the Fed are in part dictated by the balance sheet. So if Kevin Witch were to get the board of governors to say, "Okay, fine. we're going to go back to a scarce reserve system, which means we're going to shrink the Fed balance sheet probably by at least a quarter, if not more. Then I think he could make a credible argument that says if we're going to force the markets to support this much additional duration in terms of having to buy government securities and other types of securities that the Fed doesn't own, then yes, rates do have to fall on the short end. There's not a whole lot the Fed can do about the inflation from the Gulf War. You know, let's be fair. It's not going to impact things that much.

[00:15:50]So, I do think there's room for wars to make structural changes in the way that the Fed manages their balance sheet. And again, most economists don't talk about this, Julia, because they don't understand it. You know, for example, I had a couple readers uh reach out to me this week say, "Chris, I love this piece about Kevin Wars. What are you talking about? And one of the things I had to clarify for them is that when the Fed buys securities, it goes into this special little room and it's isolated from the market. So that six or 7 trillion worth of securities they own do not impact market rates. They don't impact spreads. If you ask the markets now with a smaller Fed balance sheet to support more of that paper in the marketplace itself, then that additional duration is going to actually force the Fed to to keep rates lower. So for example, let's say uh Chairman Worsh decides he swaps the $2 trillion worth of mortgage securities to the Treasury and Treasury gives him similar maturity uh bonds and probably notes and T bills actually. That in and of itself is a big change for the markets and one of the reasons that the market has had such an easy time over the past five six years even before co was that the Fed had all of this paper. At one point they were buying basically all of the new issue mortgage bonds in 202021.

[00:17:20]So that drove up house prices, right?

[00:17:23]But it also had a big impact on the bond market. So if we, you know, I don't think Wars is going to give up on his objective of having a smaller Fed balance sheet. The question is when can he do it and how does he do it? And that's why we wrote that piece earlier this week.

[00:17:39]>> Chris, we have a lot of viewer mail today. Um, and I would love to give our viewers a chance to ask questions. And folks, you can always email me at [email protected] or leave a comment if you have a question for Chris. All right, Chris, this one comes from Timothy. Why can't we see a scenario where inflation goes up with oil 10ear at 5% or just over?

[00:18:04]Fed initially won't cut rates. The economy gets weaker with rising interest rates and financing cost. Cracks hit private equity further and banks and consumers. Stocks drop 20 or 25% back to the 200 day moving average. Fed then cuts rates in response. The economic data weakens and tenure craters back to 3.5 and we are sucked right back into a liquidity trap of lower rates and lower demand again.

[00:18:32]>> Well, that make a great movie. Um, I do agree with the question in terms of how he puts it. The issue is, are we going to see that repeat of that kind of reaction that we saw during COVID when the Fed rushed in, dropped short-term rates down to zero, and the rest of the interest rate complex dropped rather considerably. I think the Fed is ultimately going to be forced to raise rates rather than drop them initially and then we'll see how much tolerance this economy has for for higher rates.

[00:19:09]you know, the growth has been pretty impressive even with the way things have been with inflation. So, I don't know that we won't see that. In other words, if the Fed is forced to capitulate and drop rates in response to a liquidity crisis, we could see a big rally in say the 10-year, but I'm not sure we're going to get down below four uh anytime soon. I think we may be seeing a reset where medium to long-term rates, say five years and out are going to remain elevated. So, you could see eventually, you know, maybe end of this year, early next year after a rate uh hike or two that the Fed has to reverse because the economy slows down, right? But you may see those long-term rates remain elevated. And this is one of the reasons I'm pretty happy with my position in Italy. uh you know the short end is not going to move that much and if mortgage rates and the long end of the bond market continue to rise they're going to have more spread. So that works. I like that.

[00:20:11]>> Mhm. you might um be able to answer Allen's question because he says, >> "If higher rates for longer forces consolidation in the mortgage industry, do you anticipate that high interest rates or a fluctuating yield curve may erode the spread between the interest Annie earns on its mortgage assets and the short-term borrowing costs used to finance them? And do you anticipate this negatively impacting earnings available for distribution EAD at the current distribution level of.7 cents per common share dividend currently paid out in 2026? What is the likelihood of annually dividends paid out going lower in 2026?

[00:20:49]>> I am pretty uh sanguin about my position. I don't think you're going to see them playing with the dividend in the next year uh for the simple reason that they have plenty of room uh to continue to support it. You know, what's your I guess you have to ask yourself, how much are short-term rates going to go up? Are we going to see short-term rates get up to three and a half 4%.

[00:21:11]I don't know. I I don't think we're going to going to see that in the near term. And to me, again, I think the REITs are going to have a lot of room to maneuver in terms of buying new assets.

[00:21:23]Uh with Italy in particular, remember their mortgage servicing assets have just gone up dramatically because of the move in interest rates. And what that means is they're not going to prepay.

[00:21:34]They're not going to disappear as fast and they're going to continue to be thrown off income for the read. So unlike some of the other mortgage reads, the fact that Annalie owns mortgage servicing rights helps them a lot in terms of balancing the duration on their book. But I think that word duration is something everybody is going to be learning about in the next few months.

[00:21:55]It's going to become an extremely important concept for economists and policy makers and investment managers.

[00:22:02]So yeah, for now I'm I'm quite happy uh with my position in Analy. I'm going to be adding to that actually and also our silver holdings. All right, Tom writes in, "Chris, how do you explain the 1970s worst inflation in the history of the country, but the Dow didn't make a newer sorry, but the Dow didn't make a new high over the entire decade?"

[00:22:27]>> What big picture change or the the difference between today and and the 70s is is demographics. those young families in the 70s were not nearly as invested in stocks and bonds as they are today and they also behave differently. I I you know was a young man living through that period and home prices did go up a lot in the 70s because of the inflation.

[00:22:52]Uh but stocks as you say that was kind of a lost decade for stocks. I think, you know, the thing I'm seeing in stocks today is that there are story stocks like AI. Everybody is trying to bank to spend on AI. But one interesting thing I I talked to John Daart about this week is you're starting to see efforts around the country to regulate data centers, to regulate their use of electricity and other factors. So, I think this whole AI buildout uh wave that's been pushing stocks up, you know, we own AMD, for example, and it's up dramatically. I bought that stock when nobody wanted it, and uh it's just screamed, and it's moving much better than Nvidia, which I find just remarkable. Nvidia's kind of almost got to be too well-known, too commonplace. So, people are looking to other areas for for alpha. But, you know, I take the point. The 70s were a remarkable period of really poor stock performance. And could we see that again? Yes, absolutely. Because remember interest rates were quite high when Paul Vulkar was fighting inflation at the end of the decade. So that was your alternative to stocks and real estate also did very well during that period.

[00:24:05]>> All right. This one comes from my Berkeley.

[00:24:09]I take exception with Julia's comment that the blue states may need to change their policies in order to make housing more affordable. What exactly are the policies? California, for instance, has the fourth largest economy where people have gone to see opportunity, contrary to the media's narrative. The West Coast has more moderate weather and is more land constricted. I think the idea that regulation is constricting housing affordability to the degree necessary to address the imbalance is a red herring.

[00:24:41]>> No, I would disagree with our uh our viewer. I think look, zoning restrictions in California are well documented. Uh it is extremely difficult to build affordable housing in California because the existing homeowners don't want it.

[00:24:57]uh you have the same discussion happening around the country and mostly in blue states. The reason I just almost doubled my money on a house sale in New York over 5 years is because there's no new construction. Now, part of this is land availability.

[00:25:14]Nobody necessarily wants to live in new housing in the valley or in the eastern part of California where some of my relatives live. Uh but you know the truth of the matter is it's difficult to build in blue states. They tend to have the worst uh restrictions in terms of local zoning and ordinances and everything else. The mortgage bankers association have done a lot of work on this and there's a lot of research out there. Urban institute and others who who've really looked at this issue uh dramatically. Uh Ed Pinto at American Enterprise Institute is another one.

[00:25:48]He's been talking about increasing density in some of these communities and places like California. So, you know, the problem is politics. Nobody wants it. When you when you raise the issue, they're like, "Oh, no, no, you can't do that in my neighborhood." Uh, and you know, that's historically been the problem. You got to have zoning change in order to allow for higher density.

[00:26:10]And density, I think, will address a lot of the the need for for affordable housing. But that's a big political it's a local political issue. Julia, >> hey guys, thank you so much for watching this video. If you can just take a quick moment and hit that subscribe button, we are trying to hit our next goal of 100,000 subscribers. Really appreciate you. And back to the video. All right, Martin would like to know, what are your thoughts on the funding crisis for Social Security and Medicare? Many economists believe a combination of taxes and means testing will be part of the solution. Martin, this is what he believes. I believe, for example, if you have 5 million in assets or 500,000 in annual household income, you have won the economic game of life and maybe you will not receive the payment you are due. What do you see the solution or solutions? What do you see those as or what will those be? when they put social security in place uh during the Great Depression, you had more than 10 workers for every retiree. That math is now reversed. So, I do think you're probably going to see over time social security means tested and they will essentially default on the pretense that this was savings. Uh there was never any asset in the trust fund. The trust fund holds treasury securities. So, in order for the trust fund to liqufy those securities and make a payment to a beneficiary, the treasury has to go out and raise cash. They have to refinance that dollar of non-marketable treasuries that's held by the social security trust fund. And then they have to refinance the dollar that they used those funds for to uh you know make other payments for the government. So all of this ultimately comes back to the treasury.

[00:28:02]The politics are such that I suspect that they're going to extend the current social security program uh at some point. You know, I'm going to start taking my benefits, but I don't know that I'm going to get them for long. My assumption is that I won't. Uh and I think if you understand the way the program works, uh that's not a big surprise. Politically, it's still the third rail of American politics. If you start talking about making significant changes to social security, you're probably not going to win your next election.

[00:28:36]>> Oh, yeah. Yeah. That is the third row, isn't it? All right. Final viewer question today from Steve. Can you ask Chris about Congress giving stable coin access to the to the reserve status?

[00:28:49]>> Uh, I don't think that's going to happen uh anytime soon. You know, the notion of stable coins as some kind of a an independent asset, I think, is is a little bit far-fetched. You know, what they are is tokens that people can buy because there is value. Uh, in other words, you paid for them and they have to keep a reserve behind them so that they can essentially liqufy the stable coin when you ask. It's almost like a demand deposit at a bank. Uh the crypto industry has been trying really hard to get Congress to pass more legislation to give uh all sorts of crypto tokens uh enhanced legal status. But I would tell you that the fact that Michael Sailor at Strategy has recently uh reversed his position and now he's talking about selling some of his Bitcoin hoarde, he's probably the the chief reason that Bitcoin has rebounded in terms of price.

[00:29:47]Uh I think the bloom is off the rose in crypto and I would encourage all of our viewers to be very very careful uh playing with these things. If you have profits in crypto coins, take them, put it in the bank, go out and buy some real estate. Uh because I think that the growing number of people who have gotten away from that asset class is striking.

[00:30:10]And remember, we wrote a piece about this last year. Wall Street ultimately killed Bitcoin. The ETFs that trade these tokens go up and down. And when they go down, they drag the price down rather dramatically. You and I both know, our friend Michael Green at Simplifies been writing about this for years. That passive investor component in crypto tokens now to me is the deathnell of that asset class. uh there's just no way for a crypto investor to be able to tell what's going to happen with all those big ETFs on Wall Street to now trade those tokens indirectly. So I I think the passive investment mechanism that has dominated Wall Street, dominated the stock market is also extremely important when you look at crypto tokens like Bitcoin.

[00:31:02]>> I have to say that was actually really fun everyone for sending all of the great questions in. And um I think that was the most uh that was the most number we we've received in a week. We really like it. So fun. I love just seeing what everybody's interested in. Chris, um we have a long weekend here, but >> um you kind of teased at the top like what you're going to be writing about, but um yeah, let's I want to hand it to you for some parting thoughts. Anything that you want folks to think about? Um the floor is all yours. Well, the one thought I would leave everybody with this week is that we are in the midst of a significant change in narratives for both the investment world and interest rates and housing and the rest of it for the past 15 years. Really going back to the great financial crisis, you have had a relatively easy time because the Federal Reserve uh provided enormous amounts of liquidity to make it all better. uh whether you talk about private credit or private equity or whatever it is, those asset classes grew because of inflation and the inflation occurred because of the Fed. You know, the Fed has a dual mandate to promote employment, promote price stability, but their real mandate, the ultimate thing that the Fed chairman thinks about every morning when they're getting dressed is market stability. So now that you're going to a regime with Kevin Worsh where he wants to go back to a more limited role for the central bank, I think that's going to increase market volatility and we've got to get used to that. The other issue, of course, is Donald Trump and the White House. Every day he comes up with a new and wonderful wacky idea which is causing his supporters to run away from him. So, I do think, you know, the effective end of the Trump administration will probably be the November elections and he could be facing a Democratic Congress on both sides of the Hill. Uh, and that means he's going to be facing a lot of criticism and a lot of opposition.

[00:33:03]>> Chris Whan, chairman of Whan Global Advisors, author of the institutional risk analyst blog, the very best independent analyst you will find on Wall Street. I want to thank you for being so generous with your time and doing this with me every single week.

[00:33:16]I'm having so much fundeed and this audience has been absolutely amazing. I also want to thank our partners over at Gold Co. You can head to goldco.com/thereap to get your free 2026 gold and silver kit or you could also give them a call at 855-573817.

[00:33:35]And thank you so much everyone and that's a wrap. We will see you next Saturday.