TDI Podcast – The Real Risk Explained (#984)

21:42JCD:Right.

21:43Christopher Whalen:So one of your strengths, you talk about working in mortgages, is digging through the financials, right? Getting down and dirty into understanding that. And you just pointed out the fact that, you know, you look at that area, it's different for every single, literally every single house, right? Every single person that's in there. You could have someone in the same neighborhood with the same amount of mortgage, the same bank living next door with an identical house. Entirely different setup of what is it going to be for that mortgage. With that understanding and looking at what you've seen, how much of today's risk do you think is hidden?

22:19Because that's the big plan, right?

22:22Christopher Whalen:to make sure that while we are attempting to do the right thing by our investors, sometimes things don't go right and we've got to kind of not show them all that because we can end in demise really quickly. So is the accounting methodologies or something going on today that you see as concerning?

22:43JCD:Well, the regulation that occurred after the great financial crisis, as they call it, drove a lot of activities into other sectors. So, for example, you couldn't earn the big fees in public markets that you could 20 years ago. So where did these people go? They went to private credit. That's where they could still earn their two and 20. And I think that right now, if you look at the financial markets today, as we go through second quarter earnings, the big problem is that the public markets are clearly on fire because of AI. and that's actually starting to collapse. I told my readers to get out at the end of last year, in fact.

23:26JCD:And then the private stuff is even more concerning because what you have is banks that have been disintermediated by the Apollos and the Brookfields and the Blue Owls. I love that name. And they have tried to compete. But what you've seen for the last six quarters is the yields are falling. And that means that banks have to compete. They have to drop their cost of funds, you know, and they have been doing that. But they also have to drop what they charge for loans if they want to win the asset. Because your customer is going to go to somebody else.

24:00Christopher Whalen:With that's happening, we still saw a lot of the banks do very good. Net interest margin reports were generally okay.

24:07JCD:No, no. Yields on earning assets have been falling for six quarters. Now, the margin is still okay because funding costs have been falling. Not as much, but they have been falling a lot. But, you know, what I do with banks is I always tear apart, what do you make on assets, loans, securities, right? And then I look at funding. I look at credit, obviously. And that gives you a whole picture of the interest rate side of the house. And then you look at the non-interest rate side, the fees, the investment banking. So that part's been going great.

24:38Christopher Whalen:Yeah, great.

24:38JCD:Oh, my God. But, you know, most of the banks are kind of flatted down on the making money on money part. Right. Right.

24:46Christopher Whalen:You know, it's interesting because you saw the differentiation clearly between like a Goldman, which just had extraordinary numbers, SpaceX, and J.P. Morgan that had unbelievable numbers, SpaceX, and the things that went on with that. And then you look at the others like the Wells and, well, let's just say non-investment banking centric companies, which is right back to what you just said. That is the proof of what you said, right, in a reverse methodology.

25:12JCD:Oh, totally. And, you know, it is what it is. The banks are making hay where they can, particularly Goldman. Goldman is infinitely flexible. But the big story with Goldman this quarter was that they got rid of Apple. That means that their smallest line item, Platform Solutions, is going to probably disappear. And now they're going to be back to being a two-line company.

25:36Christopher Whalen:That was the Markham card, right?

25:39JCD:Yeah. The credit card thing that they tried to get into? No, no. Marcus was their own invention. That was their attempt to kind of get into banking, have an offering for their asset management clients and their private banking clients, which is fine. They're not really good at that because they're not really bankers. Most of Goldman's a broker-dealer. But what they had done was they said, well, we'll get into white-label credit cards, which is a profoundly bad idea. And so they ended up being the sponsor for Apple, the Apple portfolio is only$20 billion. It's barely big enough to even care. And so now that book is going to JP Morgan.

26:20JCD:Jamie, I think, has a lot more leverage. He's going to be able to keep them in line. But you would think Apple would have a bigger book, honestly. The reason why I mentioned Marcus, I thought that was the name of the company,

26:32Christopher Whalen:of the, in other words, with Goldman, the card that they issued on the -

26:37JCD:Yes. Maybe. I'm not sure what they gave to the Apple people. I think Apple had their name on it. But white label credit card is a tough business. There are some banks that have done it historically. Jamie Dimon, he's got about a third of his credit card business now in white label. God bless him. But you own the credit. So when the credit goes bad, it's your expense. Right. And I think, you know, on the good side, they're going to see their credit losses go down. We're going to just see the wholesale book now at Goldman, which is another conversation we could have because they bank a lot of people that J.P.

27:14JCD:Morgan won't bank. OK. And they don't have a very low cost of funds at Goldman. So they have to charge a lot. Their gross spread on their loans is around 10 percent. That's twice J.P. Morgan. And so what they do is they charge a lot. They're more aggressive on what they'll give you in terms of advance rates. But overall, you know, it's tough for them to be in that business. It's not impossible, but it's not like they, you know, not like somebody like Truist, which has the lowest cost of funds among the top seven. So they have a lot of money to play with. And JP, too. JP's got very low cost of funds.

27:51Christopher Whalen:So now in modern day accounting, is the items that we've been told are and the rationale for what's going on in a lot of companies, this, you know, quest for transparency because we're the good guys. You know, we're going to show you everything. Right. Right. Or is it is it is it more just, you know, word garbage? Right. Where it's a talk in the talk and this whole idea, but buried beneath the footnotes and even end notes and even, you know, disappearing ink in some cases. Right. That it's really not as transparent as everybody would think. And one thing I will say is that I've been in this business for however long.

28:31Christopher Whalen:Literally, people are like, what do you think of the bank earnings? I'm like, you know, I'm not going to try. I'm literally not going to try. Seriously.

28:38JCD:Well, banks are relatively easy compared to mortgage companies. Yeah, I'm sure.

28:41Christopher Whalen:Right, right. But so is the modern day transparency with financial institutions something that we should applaud or is it just total bullshit?

28:51JCD:I think it's largely bullshit. The reason is, is that they only show you so much. You know, they go down to basically the first level, if you will, in terms of the general ledger of the company. So they're showing you business lines. They're showing you significant subsets of that if they're big enough. So, for example, many banks don't break out loans to non-depository financial institutions, even though that's the fastest growing line item on most of their balance sheets. The FDIC gives us an aggregate number and we can back into some of the other numbers. But they still haven't forced the banks to put that line item on their call reports, even though now it's gotten to be a trillion and a half dollars.

29:35JCD:There's over three trillion dollars in unused lines behind that. So you're figuring, you know, over four trillion dollars in exposure. And the FDIC still hasn't gotten around to forcing the banks to disclose it as a separate business line.

29:50Christopher Whalen:But the banks will use that against individuals who are applying for a credit card or credit for any open lines that you have that are unused. They will use that as something. And by the way, taking that and reversing that back to the banks, that's why they don't want it released.

30:07JCD:Perhaps, but I think it's just a matter of risk. You know, the big problem today for the banks is that they have to compete with the non-banks. The Apollos and the Brookfields and all the rest of them have access to capital that's almost equal to that of the banks. So if I'm a company today and I'm looking for financing, let's say I'm a very good credit, right? I go to JP. They quote me whatever. Then I go to Apollo. And Apollo may beat JP's price. Right. So in that case, you know, the banks have to work extra hard. And what's happened is the rest of the loan book has only been growing 1%, 2 % a year.

30:45JCD:So all of a sudden, they have private equity guys who they want to do business with, remember, coming to them saying, hey, our portfolio company has a couple of components that aren't making money right now. We need to pay dividends. Will you give us a loan? So they'll make a loan to a private equity fund on a non-recourse basis, right? They have no way of getting paid back. Unless, say, the company has become profitable, I mean, what is the sponsor going to do? tell the LPs that they have to pony up more cash to pay back JP Morgan. Right. And they're not going to sue them, right? Yeah. They've already accepted it as non-recourse.

31:23Christopher Whalen:Yeah.

31:24JCD:So that's, to me, the problem we face with private credit. Private credit's a slow motion train wreck, is what I like to call it. And it's going to continue to be a train wreck because half of these companies are insolvent. They're paying their debt with payment in kind where they give you equity of dubious value. And some people will actually take that equity and pretend that the value of the investment went up.

31:49Christopher Whalen:Well, I mean, we've seen that kind of thing where I've seen this. I don't know if you agree with this. I'm going to go off script of the banking area for a second where, you know, you have the financing of income. So, for example, when Microsoft takes money off their balance sheet and gives it to XYZ AI company and says, by the way, we're going to give you$4 billion. and part of the deal is we're going to take a piece of your company and you're going to buy back a$3 billion contract over a four-year period with Azure, and all of a sudden magically IBM's revenues slash income go up. And what they've done is, tell me what you think, but what I think is they basically took magically money off the balance sheet and put it on their income statement.

32:34JCD:That's right. Right. Now, you know, we should always remember that public disclosure is an oil painting. It's not meant to be an x-ray. So the requirements from the FCC say you have to show us so much. And the investor relations guys will only show us so much because that's their job. Right. And in the case of things like private credit, well, they showed us a little at the end of last year, some of the banks in the first quarter gave us a page or two on it. But now, no, they've taken it back. Right. Because the lawyers told them, if you put this out as a regular disclosure, you have to continue to do it.

33:14JCD:So that's what's going on there.

33:16Christopher Whalen:I think it's fascinating that, you know, we have these companies like, go back to crypto for a second, you know, oh, we need to have this in your 401k plans, right? Now, private equity, private credit was like a part. I was at an event. I was at down in Miami a year ago at the, I forgot what event it was. It was some event. I think it was Ritholtz's event. And I was literally, I went to this cocktail party and it was like, I was like crap with flies around me, just descended upon by these people. They don't owe me from anybody. How much of your portfolio of your clients are in private equity? I'm like, what?

33:49Christopher Whalen:Why are you asking me this, right? This whole discussion and almost like this peer pressuring, Weird.

33:55JCD:Well, you notice how quiet they're being now. How quiet.

33:58Christopher Whalen:Remember last year?

33:59JCD:We had retail shops out advertising private credit on television. Yep.

34:04Christopher Whalen:And then all of a sudden we have the holdbacks, no requirements, and no money coming out. It's crazy. So I don't know if that's one of them, but you've said one of the biggest risks. No, no.

34:12JCD:The same guys were talking about crypto rather loudly.

34:15Christopher Whalen:Right. Right. Exactly. Now, you often say the biggest risks aren't where everybody's looking. I think you've said that a lot. And historically, the markets have been consistently underestimating risk. I think that's something you've also talked about. Where do you think that we're making the same mistake now?

34:37JCD:Well, the obvious ones, you know, if you look at margin credit, the debit side has gone straight up to the moon and the credit side is not moving. So that tells you that that's a naked, you know, long position. And these markets are starting to revert to the mean. You saw the same thing with gold. Can you just back up? I'm sorry to interrupt.

34:55Christopher Whalen:Can you just give me a little explanation of what those things mean?

34:59JCD:When you see margin credit going up, look at the numbers that FINRA discloses, right? They have a debit side, which is people borrowing money to go out and buy stocks. And then they have a credit side, which is how much money is in the account that could compensate that. In other words, what do they have in their margin account in terms of equity? and the two numbers have just diverged. That's not normal. That's been something very recently. So what it tells you is that the amount of speculation today in public markets, particularly in AI and related tech stocks, has been extraordinary. There's a huge amount of manipulation involving agentic trading where people create bots and they tell the bot, you know, go out and make money.

35:44JCD:So the bot does. The bot goes out and trades stock without any intervention from you But you can really do a lot of malicious things in the market using this technology. And nobody at the Trump administration cares because they're too busy making money for themselves.

36:01Christopher Whalen:Making money. It's all about making money.

36:03JCD:You know, Paul Atkins at the SEC, forget about it. He's worried about crypto. Yeah. And he's an old friend, by the way. I love the man. He's a great conservative, but not a good guy to have as a regulator. And in my dad's book on Joe Kennedy, the first chapter is about Joe at the SEC. And he knew about speculators. You didn't have to tell him anything about that. So we're going to come back to that because this period we've been in since the great financial crisis, which I think really is a function of everybody being terrified. Many, many, many of us after 2008, 2009, 2010 were broke. Most of our assets had declined enormously in value, and the leverage was gone, right?

36:47JCD:So we had to rebuild these markets. And I think that scar tissue still stays with us, and it's caused behavior to get really crazy. And I mean, you know, both in public and private markets. So that's what I worry about. I think that, you know, some banks are laying off risk very astutely. Yep. And there are people standing there that are willing to buy it at top dollar, by the way. Always. Yeah. And then there are others who aren't. So there's always dumb guys in the room. The greater fool theory we call that, right? So look at Bank of America. How on earth did Brian make all those mortgages in 2020 and 21?

37:25JCD:And he didn't sell them for a profit. He could have sold those twos at 104. In other words, I have friends who have 2 % mortgages from Bank of America that today trade in the high 60s, low 70s if you wanted to sell them. Right. Well, that's why he's earning less than 3 % on his$800 billion bond portfolio.

37:46Christopher Whalen:And I thank him for my 2.75 % mortgage, which, by the way, my wife says, why don't we pay it off? I'm like, are you kidding? No. I'd take out more if I could.

37:54JCD:Tell her to have a party when you die. That's right. Exactly.

37:57Christopher Whalen:You know, it's interesting because you talk about the leverage margin issues. You know, look what happened in Korea recently where not only were the margin to the hilt, but they were trading significant leverage products. Forget about other things you're doing too. But, you know, not only do we have the margin, the leverage, the divergence of the debit credit side, but you also have the leverage side of things, whether it could be futures or it could be just levered products that the average investor has. And that's not really calculated into the whole margin thesis, is it?

38:28JCD:No, no, it's not. And, you know, these markets in Asia trade the way our markets did in the 1920s. Right. When Americans first got into investing and they, oh, wow, how cool is this, right? Stocks, margin. So, you know, the same kind of intensity and the same kind of willingness to take risk that they may or may not understand is very evident in the Asian markets.

38:53Christopher Whalen:Can we switch back to private credit for a second? Because this is something that's been bugging me. I have some clients that we adopted positions from, from a variety of these private credit. We try to go through the financials, but we know we're only getting the financials they want us to see. You know, whether they're side-pocketing, whether they're just not disclosing, or whether they're just holding a mark to wish. Would that be the right word? Mark to fantasy? Definitely not mark to market on some of this stuff, right? Oh, no.

39:21JCD:No, no, no. You're the sponsor to tell you what it's worth.

39:26Christopher Whalen:Yeah.

39:26JCD:And you've signed an NDA, so you can't complain.

39:30Christopher Whalen:Yeah.

39:31JCD:You know, the way they run these funds now, when they get to the end of the fund life and they are supposed to sell it, oftentimes they'll sell it to another private equity company or they'll do what's called a continuation fund where they'll force the LPs to stay in. but they'll just reset the clock and put the assets in a new vehicle. And it's totally opaque. There's absolutely no reason on earth why you would want retail investors or even high net worth individuals to get involved in this crap. If you have institutionals and insurance companies that want to play here, okay, they have the wherewithal to deal with this, and they can get better terms because they don't have to sign those NDAs that retail people do.

40:16Christopher Whalen:Chris, one of the things that have happened is that the retail is either sold or convinced that this is a good opportunity because it's institutional, right? That's what the institutions do. Right. That's first. Second, it's like, well, do you need the money right now? Well, you've got a high net worth person. It's like, oh, I don't need this$4 or$5 million out of my$50 million. I can leave that in for the quote-unquote four to seven, right? That's a four to seven year period that they always talk about. this issue of some liquidity event that comes on IPO slash buyout something. Meanwhile, what I see on my end, by the way, is the continuation of capital calls.

40:52Christopher Whalen:And when they do distributions, they reset those as recallable distributions for capital calls in the future. I'm like, wait, what happened with just this standard distribution that you get from an income source? No, it's a recallable. So you constantly have to feed this monster, right? That every time they get some, That's right. It's terrible.

41:10JCD:But what's - Well, think about the other side of it, though. The reason for this is that most of these big sponsors of private equity, private credit, have all gone out and bought insurance companies. So they have to feed the beast. Yeah. Now, how do you feed the beast? On the one hand, you have annuities on the liability side of the ledger. And then on the asset side of the ledger, you have private credit, loans. You have agreements, for example, by your customers where they have, you know, essentially lent money via a note. You know, these are a special type of instrument insurance companies use.

41:49JCD:So the amount of demand from these insurance companies that have been turned into private credit machines is vast. And that's also spilled over in the housing. The reason you have such a vast demand right now for business purpose loans that are supposed to be for rental properties is because of this. The insurance companies are lining up out the door.

42:11Christopher Whalen:Crazy question, and I'm not asking you to give advice on this, but I'll ask it this way. Have you thought about the opportunity to maybe short some of these insurance companies? Because historically, these guys who have these long-range type of – now, listen, some of their portfolios matched, right? The long-term nature of an annuity matched to a long-term nature of private credit, not mismatched like you have this really short-term liability with a very long-term asset, right? That's not how a lot of this is. But still, we start seeing markdowns. And if reality ever hits, that could be a problem directly to the insurance companies as I see it.

42:45JCD:I don't follow the insurers closely enough to actually take a long-short view. I have been thinking about laying down some shorts on some of the smaller, more aggressive banks, simply because some of these outliers are clearly over their skis. They're making loans with AI and all of this nonsense that we haven't been able to test because we really haven't had a recession since 2008. The Fed hasn't allowed it. So because the Fed has been so absolutely benevolent with liquidity, we have a situation where today bank-owned mortgages still have a default rate that's about zero. And what that means is that if somebody actually defaults, they have enough cash on the table that they can just buy them out, sell the house, hand them the excess, and say, get your life together, goodbye.

43:42JCD:So you don't even see the default. And then from a credit perspective, when you look at the whole portfolio, what we call loss given default, which is recoveries less charge-offs, is about zero. So that's what the Fed did. When they pushed up asset prices 50 % in resi, it solved a lot of problems, but it also created problems. Meanwhile, if you look at multifamily apartment buildings, it's been in a dump since really 2022, 2021. Loss rates are 100 % of the loan. So that's not good. It shows you what politics and affordability are doing to that asset class.

44:25Christopher Whalen:You know, it's interesting because many of the areas that you talk about where the Fed won't allow for a recession, one of my favorite things that happened, I think, in the most recent timeframe was when the Fed came to the rescue of the banks where they raised interest rates. And what happened was, of course, we saw that by going from a negative interest rate or a zero for that matter to anything other than that was an enormous differential in terms of percentage. and it sunk all these bonds because the banks thought this was going to be forever. Sure, I'll buy that 1 % bond. I'll buy that 0 % bond.

45:02Christopher Whalen:And all of a sudden, they went from 100 to 80, whatever it was. But then the Fed said, don't worry about it. Market to the maturity. How great was that?

45:10JCD:Well, they should have done more. See, bankers aren't that smart. If you look at Silicon Valley Bank, they put 40 % of the bank's book in mortgage banks. and they go down in interest rates from 19 on when Powell panicked, okay? He really panicked in December of 18. And then in 19, what do they do? They start growing the balance sheet and they were selling forwards in the mortgage market to force rates down. So by the time we get to 2020 and COVID, right? Yeah. The duration on Ginnie Mays has gone from a five down to one, which I didn't even think was possible, one year. Right. And they stayed there.

45:49JCD:And so you look at these guys at Silicon Valley Bank, and the book is prepaying 50 % a year. What do they do? They go out and they buy more. So as rates started going up, as we get into 2021, the bank was already dead. They just didn't know it. And it was funny. I published comments on the Basel proposal. And I said, look, Mickey, I want you to lower the risk weight for mortgage servicing because it's inappropriate. It's too high, 250%. But we need an idiot test. We have to have a little sit-down meeting with bankers who want to own variable duration stuff. So mortgage servicing assets, whole loans, and mortgage-backed securities.

46:33JCD:All of these things change. And if you want to see what change means, just look at the Fed's balance sheet. Look at their P &L. Because when they bought those mortgage securities in 2021, they had a duration of a year or two. Now they have a duration of 15, 18, 19 years.

46:50Christopher Whalen:Yeah, with the same interest rate, by the way. Oh, yeah, they're getting killed. In plain English, it means bad investment. Bad investment.

46:58JCD:Bad investment. If you're going to run a hedge fund, you've got to pay attention. Yeah, exactly. So anyway.

47:02Christopher Whalen:Look, so let's talk about, you do have an outlook that things are a little bit concerning. Obviously, I heard from your voice that you said that obviously the earnings and equity side of things, probably from the AI and the trade with technology was good. but you got a little wary of it towards the end of the year. You have some concern about where the Fed is, the amount of debt we have. That leads us into something, which I didn't know about you until recently, actually. Not that I need to know everything about you, but I just didn't know. Was that you are a bit of a, I think for the last, well, let's think what that is, seven, eight years, you've been a big believer in hard assets, particularly gold.

47:37Christopher Whalen:Yeah, is that correct?

47:38JCD:Yes, very much. We actually, we publish the top 100 banks every quarter after earnings, And we kind of, you know, give our readers a sense of who's performing best market and fundamentals. But we started putting together a list of stocks that can give our readers access, not just to gold and silver exposures, but the miners. And the reason for this is I've always believed in gold. I'm actually working on a book on gold now that talks about the end of the U.S. effort to try and get people not to think about gold as a thing of value. Yeah. Clearly, that didn't work. That was Franklin Roosevelt. I talked about that in my last book, Inflated.

48:21JCD:But I think, you know, the fascinating thing to me is that the stepchild, silver, which for years and years was not really considered at all once we stopped using it for money in like the 1890s, is now a huge commercial commodity. And silver prices have been going up in the past couple of weeks again. So what I've said to my readers is I said, look, both of these precious metals have different strategies. One is a monetary asset. Central banks around the world are going back to the old days. They want something that's independent of politics that they can easily trade. And it's going to, if anything, go up in value over time.

49:02JCD:Meanwhile, we have silver, which is really not a monetary asset. It's more mostly for tech. Just about everything you make in tech requires silver, fodder. Right. Right. So I've been focused on that and some of the other metals. I've got some great interviews in the pipeline, by the way. We added a funny company called Bunker Hill Mine, which is a very storied penny stock. But it's been taken over by a team from Barrick Gold that's very impressive. This was one of the biggest Superfund sites in the country. So right out of the gate, Richard Williams and his team had to go sit down with the EPA and talk to them about how they were going to manage this extremely big property.

49:44JCD:And they're going into production later this year. They're going to try and be half rare metals and half silver by the time they get their full operation up and running. I think it's very exciting. And you're going to see more of this in the U.S. There's no dirt out there for the big producers. So they're going to have to buy what we call the junior miners as we go forward in time. So I like paying attention to them. They're interesting stories.

50:09Christopher Whalen:And you have some kind of, you're a branded ambassador for a company now, right?

50:14JCD:Yes, we have a sponsor, Monetary Metals, which is a really cool company created by Keith Weiner. And what Keith has done, which was the obvious thing, is provided a return on gold. So he lends his gold to people that need it, mostly jewelers around the world, and he pays his customers a 4 % yield. See, the problem with gold is if a jeweler needs it, doesn't the jeweler just get it? How does it lend it? No, no, because it's very costly to keep the inventory you need. Oh, gotcha. Yeah, if you're an Indian jeweler or in Turkey, you're talking about 24 karat gold. Right. So you are looking at inventory that runs into millions of dollars.

50:57JCD:So what they do is they have a just-in-time kind of supply system. They charge them a fee so they don't have to have their capital fully tied up in their inventory. And he's able to give people a return on the metal, which makes it work. Because if you think about it, the institutional players have never liked precious metals because it doesn't correlate to any of the benchmarks. Right. It doesn't have a natural carry. Which is what I like about it, by the way. Just as one reference. Yes, if you have the patience to get through the periods like today when it's been selling off.

51:33Christopher Whalen:Right.

51:33JCD:A lot of, you know, the small investors who are price oriented look at gold prices the way they look at stock prices. If you go to the Far East, that's very different. Very different. Because they're talking about taking physical delivery and putting it in the bank and forgetting about it.

51:50Christopher Whalen:Well, but you look at India, they have like a clear and definitive cycle of the wedding season that is all gold-based. Yes. Right? They're all about that. Right?

52:00JCD:Totally. Whereas here— Jewelry is seen as a way to amass wealth, and they can trade it because it's 24 karat. Yep.

52:08Christopher Whalen:And the difference between gold, which we don't know if we're going to ever get to this point, but diamonds, whoever thought. Fake diamonds or lab-grown diamonds. The diamond industry, have you seen the price of a diamond? Oh, my God.

52:20JCD:Yeah.

52:21Christopher Whalen:Horrible. Horrible.

52:22JCD:I know. And now you— Well, listen. Who knows what we were— When I was in Villanova, I did sports photography. Yeah. And my first camera, which I got from a friend of my parents, was a Leica. Oh. And it had a 180 zoom on it that was so heavy you had to put a monopod under it. It was made from quartz from the Baltic. Oh. That's where they make lenses, right? Right. But over time, the Japanese started manufacturing crystal in labs, which was much lighter, much more flexible in terms of making lenses. And they won. Even though the color spectrum on that Leica, you can't replicate that with artificial glass.

52:59JCD:It's made out of quartz. So, you know, it's funny because things change. There's nothing we can do about that. And diamonds are the same problem. They can make them in labs and they're flawless. Yeah. Amazing. So let's close with this and talk about, you know, after you're, you've studied financial

53:20Christopher Whalen:crises. I mean, obviously anybody in the fixed income area, banking area, has to have a career that they say studied financial crisis because that's where they blossom from usually. That's where they germinate, right? That is the banking oftentimes. Unfortunately, that's what it is. what's one lesson that you think maybe, you know, you can impart to investors that, you know, before the next one arrives, I guess, you know, if there is one? Or is the Fed just going to permanently put a no, you can't do that on the recession posture? Well, I think our current Fed chairman, Kevin Warsh, who I've known for a long time, is not going to do what the Fed did under Powell and Janet Yellen.

54:06JCD:Specifically, if he has to ride to the rescue of the Treasury market, the way we did in March 2020, he would keep the spigot open until the crisis was gone. And then he would shut it off. So the trouble for the U.S. economy is that we've used falling interest rates for 35, 40 years to manufacture nominal growth in the economy, while at the same time our people were slowly losing ground to inflation. When we had COVID, though, the rate of inflation accelerated rather dramatically. And I would tell you it's actually much, much higher than the statistical evidence. I would believe you. And I think that we're going to see perhaps even double-digit inflation by the end of this year because fuel prices, prices for things like fertilizer that you need sulfuric acid for, all of these things were coming from the Middle East.

54:59JCD:The whole world had optimized around the Gulf states, some producers in Asia too, in terms of price. So, for example, we don't refine fuel on the West Coast of the United States anymore. There are no refineries in California. So I think, you know, unfortunately, the future is going to be about scarcity and inflation. And in order to protect yourself, you're going to have to do precious metals. You're going to have to carefully look at real estate as a shelter. But you've got to remember that there's going to be an awful lot of Americans out there that aren't going to be able to do anything. You know, I think about the number of people who are literally trapped in New York City who can't leave.

55:40JCD:and I've said for years, we should be resettling low-income families. Because think about our experience. We moved down to Florida this year. Yeah, you're right across from me, by the way. You're direct west. Yeah, I'm in Fort Lauderdale. You're over on the west coast. That's right. Yep. So when we left New York City, we went to Westchester, which is one of the most affluent communities in the United States. Cut our costs in half. Yep. In half. Yep. We moved down to Florida, we cut our costs in half. Right. When we sold our house in New York, the price had doubled in five years. That's crazy. But it's because they don't build new homes in New York State, the politics and the costs and everything else.

56:19JCD:So I think inflation, unfortunately, and affordability, if that's what you want to call it, are going to be the key benchmarks you're going to use for protecting assets and protecting yourself and your loved ones. And, you know, I've rotated to a focus on precious metals. I still follow the financials because people like stocks, right, the shiny object. But, you know, I think long term people are going to have to focus on gold and silver as just a way to shelter themselves.

56:49Christopher Whalen:I guess the last question to follow up to that is this. We know that the Strait of Hormuz is running 10, 15 percent of capacity. We know that the reserves around the world in terms of oil reserves are down substantially. We know that the strategic oil reserves are also down substantially. And why the price has not escalated is probably due to the fact that all the strategic reserves have been purged. And probably why Trump, you know, said, OK, war is over because he recognized that, man, any longer we got a real problem here. You know, between the urea and the sulfuric acid and all that stuff coming through and, you know, on and on and on and on.

57:25Christopher Whalen:Now, they're finding some very interesting ways to get around some of this, a little bit of a longer way. Why are markets still not reflecting, I would say, the risk in your thesis that we're going to have this inflation moving higher by the end of the year, next year, whenever it is?

57:40JCD:I think it's just because we're still not that far from the start of the war. I have a couple of interviews with a dear friend of mine, John Dysart, on the website. John was a columnist for the FT for a long time. And he's one of the sharpest energy analysts I know, both fuel and also electricity. And he said to me, he goes, Chris, there's nowhere else to get this stuff. The Gulf states and certain plants in the Gulf that the Iranians targeted early on and destroyed, gas plants where you create other products as a part of the gas production cycle. It's going to take years to fix these things. So what's happened, and you ask a really important question, is they've been drawing down stocks all around the world.

58:25JCD:There was an awful lot of product on the seas when this war started. So all of those ships arrived, they all offloaded, and you started to see behavioral changes by the Chinese, the Koreans, others, who have stopped exporting. And they're essentially husbanding their existing supplies so that they can take care of their people. China, for example, stopped exporting sulfuric acid last year. They just said no, because they're worried about fertilizer out on the farm. And I think that the U.S., frankly, is going to have to adopt some kind of cooperative effort, if not rationing, in order to make sure that we have fuel and lubricants where we need to have it.

59:09JCD:They will create production capacity here over time. Chevron's got a big lubricants plant that's going to come online early next year. But it's not enough. And I do think medium term, and the reason your question is so important is you're going to see countries go back to more of a national approach to energy security. We're not going to just be able to follow price and say, well, you know, we'll buy diesel fuel, for example, for the West Coast of the United States from Korea, which is what we were doing. The U.S. was actually exporting diesel through the Gulf over to Europe and to other countries.

59:46JCD:So all of these things are going to have to be adjusted. And the politics of this as we go into the midterm. You start messing with energy.

59:54Christopher Whalen:Energy is a core factor for world economy and for individuals and for politics and for the pocketbook of individuals. You start messing with that and you start going to more of a nationalistic style of that and hoarding, if you will, that we have, you don't. I mean, what happens to India? What happens to even South Korea? That's right.

1:00:11JCD:But remember, West Texas and Brent are the wrong things to look at. Right. When you think about oil, you've got to say to yourself, have I ever consumed a barrel of oil? The answer is no. You consume gasoline. You consume other types of refined products. So the question is, can I get the oil that I need to put into this refinery, which is tuned up to use this sort of oil? Right? Yep. So, for example, we still refine product for Mexico. The top northern half of Mexico gets refined product from Deer Park in Texas because they just didn't have the cash to build their own refining capacity. It's actually cheaper for them to ship the oil up here, return it into refined product, and send it back down there.

1:00:56Christopher Whalen:Amazing.

1:00:57JCD:That's the economics of energy because it's a very capital-intensive business.

1:01:01Christopher Whalen:Yep, very capital-intensive. And not something where you say like, ah, we'll skip that. No. It's okay. Listen, Chris Whelan, pleasure having you. Chairman of Whelan Global Advisor, publisher of the Institutional Risk Analyst. Great books out there. Also affiliate, Branded. I want to be a Branded Bastard or something. Branded Bastard. We'll have all the information on how to get in touch with you over on thedisciplineinvestor.com. Episode number 984. By the way, approaching our, listen to this, you may not know this. In about six months, 20 years of doing this podcast. We were doing podcasts when people were like, what's a podcast?

1:01:42Christopher Whalen:What does that mean? And including me, by the way.

1:01:45JCD:I've had to get tuned up. I had to get cameras and lights and everything else. Yeah, yeah. We're all set. But we'll do it again. Maybe I'll run over there and we can do it together. Sounds great. All right, I'll talk to you. Thanks. Thank you, sir. Appreciate it.

1:01:58Christopher Whalen:And a little update, just a small update on the meniscus. I'm walking around getting PT done. Hopefully I'll be able to, I don't know if I'm going to play pickleball anytime soon, maybe a few weeks of rehab to go before the next leg of this. But I did ride a bike or the stationary bike as well as do the PT. And that was pretty good. So you have that. Chris Whalen, great guest. We have Tommy Thornton coming on from Hedge Fund Telemetry next week. I'm excited about hearing about some of his DeMarc indicators and things that he's looking at in the markets right now after a pretty unbelievably crazy week in the markets this week.

1:02:35Christopher Whalen:Thanks for joining this week and every week. And of course, as I mentioned, if you do want to sign up for the meetup, the JCD Memorial Meetup in Fort Lauderdale, go over to dhunplugged.com and click on the button. It's at the top right there. You'll see it on the right-hand side. And make sure to reserve a spot. No cause to do it, of course, but we want to know who's coming and what's going on. So with that, I just want to, for the final time, play this memoriam, this eulogy, this tribute to John C. DeBorak. Thanks for listening. It's hard to imagine saying these words today, but today we're remembering my dear friend.

1:03:20Christopher Whalen:And we're honoring my longtime podcast partner, John C. Dvorak. You know, John's passing is a tremendous loss for the entire podcasting and technology community. There's no question about that, because for decades and decades and decades, he informed, he entertained, he challenged and often delighted audiences about all his great information, knowledge, and way of being. He was a man with sharp intellect, independent thinking. He was unmistakable in his sense of humor. Sometimes dry, but a great sense of humor. He never hesitated to question anything about anything, and especially about conventional wisdom.

1:04:07Christopher Whalen:We know that from his time on the show, DH Unplugged, and No Agenda, and all the times on TV and other podcasts he's done over his career. He did so with style. He did so with grace. He did so with a sense of humor. And that was entirely all his own. For me, the loss is, it's deeply personal. I mean, John was my friend. He's my co-host for 18 plus years with energy and insight and information and countless memorable experiences and times where we talked about things that maybe weren't that interesting, but he made it interesting. The conversations we had each and every episode was unbelievable, and we didn't always agree on anything.

1:04:54Christopher Whalen:No, we didn't. In fact, a lot of times we disagreed, but in fact, over the years, we came close to understanding what each other had and the unique ability that he had to put it all in perspective and to create a better understanding for all of us. He made our audiences smarter and friendships richer. And Tuesday nights are never going to be the same, ever. Every Tuesday night for the rest of my life, I'm going to remember that, oh, it's 9 o 'clock p.m., Eastern Time. I've got to be on show and on live with John right now. The conversations we had, the laughs we had, the debates in that familiar voice are things that I'm going to miss more than words.

1:05:38Christopher Whalen:I'm sure you are as well. but while there's a void that can never be filled we're going to continue to find ways to remember John and beyond what this life has the impact that he had on all of us we're going to move forward because that's what he would have wanted I'm sure of that he believed in looking ahead he did and staying engaged and continuing the conversation. He leaves behind an incredible legacy of family who I consider part of and I'm honored to be a part of and much more than just behind the microphone. He's inspired generations of listeners, technology buffs, creators and thinkers to ask questions, to wonder, to think independently and never be afraid to speak what they think.

1:06:42Christopher Whalen:He's going to be missed by many. I know I can't even begin to tell you. I'm kind of numb to this and I can't really, I'm tingling because the thought of not being able to talk to him is, it's a big hole in my heart, in my life. He's going to be remembered by all who knew him and I miss him. Rest in peace, John. Thank you for your friendship and for sharing your remarkable gifts with me and all of us. We'll miss you. This podcast is intended for informational purposes only and does not constitute personalized investment advice. Investing involves risk, including the possible loss of principle and past performance is not indicative of future results.

1:07:26Christopher Whalen:The views and opinions expressed are those of the host and any guests and may not necessarily reflect those of Horowitz & Company, Inc. and investment advisor registered with the U.S. Securities and Exchange Commission. Registration with the SEC does not imply a certain level of training or skill. Advisory services are only offered to a client or prospective clients where Horowitz & Company is properly registered or is excluded from registration requirements. Any mention of third-party companies, products, or services is provided for informational purposes only and does not constitute an endorsement.

1:07:58Christopher Whalen:Hypothetical scenarios or forward-looking statements are for illustrated purposes and should not be viewed as guarantees. Content is intended for U.S. residents only and may not be applicable in other jurisdictions. Listeners should consult a qualified financial advisor before making any investment decisions. Please visit our website for additional information, disclosures, as well as a copy of our form CRS. Advertisements are not related to the host or affiliates and are not considered recommendations by the host of the show or any affiliates of Horowitz & Company.

1:09:01guitar solo

1:09:05We'll be right back.