Dawn J. Bennett, a certified management investment analyst and founder and CEO of Bennett Group Financial Services, recently interviewed Chris Whalen on her radio show Financial Myth Busting with Dawn J. Bennett. Chris Whalen is a senior managing director and head of research at Kroll Bond Rating Agency and has previously worked for several prominent financial firms, including Bear Stearns, Prudential Security and Tangent Capital Partners. Whalen is also the author of Inflated: How Money and Debt Built the American Dream (2011) and Financial Stability: Confidence and the Wealth of Nations (2014).
On Financial Myth Busting, Bennett and Whalen discuss what Donald Trump’s surprising victory means for the markets through the end of the year and how his views on monetary policy will affect the larger global economy.
With Trump set to take over the White House, all eyes are on the Federal Reserve, which avoided raising rates before the election. Bennett says she thinks the expectation is that Yellen now has no reason not to raise rates, and asks Whalen whether he thinks Yellen is likely to raise rates.
“Well, I think first and foremost you’ve got to look at the bond market,” Whalen said. “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.”
He continued, “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 says she thinks the country is in a jam, as Trump will have to contend with Obama’s massive debt burden that has built up over his eight-year term. Trump has to do this at a time when we are at this epic point of accommodative monetary policy. She asks Whalen what he thinks will happen when rates go up.
“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,” Whalen said. “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.”
He continued, “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.”
View the full interview here, and catch Financial Myth Busting every Sunday at 10:00 a.m. on WMAL AM 630.