How Healthy are American Banks?

Published on
August 7th, 2019
22 minutes

How Healthy are American Banks?

The Expert View ·
Featuring Chris Whalen

Published on: August 7th, 2019 • Duration: 22 minutes

Chris Whalen, chairman of Whalen Global Advisors, dives deep into the current state of the U.S. banking industry. He argues that while American financial institutions have largely recovered from the financial crisis, returns on bank stocks still haven’t recovered to pre-crisis levels. Yet in Whalen's view, banks will soon face increasing margin pressure as well as, eventually, deteriorating credit conditions. Filmed on August 2, 2019 in New York.



  • US
    Urska S.
    8 August 2019 @ 15:51
    He is not getting the fixed income market. He thinks UST's are going up because there is a strong demand for them. This goes against everything Luke Gromen, Hedgeye, Brent Johnson, Raoul himself, etc. think. UST's are gaining in value because rates are going down. There is a lot of data available to dispute Whalen's comments. He might know banks, but he doesn't comprehend that there is more than just a supply and demand at play in any market.
    • ST
      Shawn T.
      14 October 2019 @ 03:15
      "USTs are gaining in value because rates are going down" - and because rates are going down.. it makes sense for investors to lock in a higher yield now which subsequently gives rise to a stronger demand for USTs..? All prices you see in the market is a function of supply and demand. What cause the fluctuations in supply and demand is of course a much deeper rabbit hole to figure.
  • SP
    Stephane P.
    8 August 2019 @ 07:33
    Right, look at the chart rate trend for 20/30 years UST, since World War II. Rates are going to ZERO, and they are going NOW. We are following Japan, Europe, Switzerland, Scandinavia, etc....with rates going to ZERO, then NEGATIVE. Yes, inflation means positive interests rates, deflation, which we are, means negative interests rates, and it's normal, the new Paradigm. Get used to it.
    • DS
      David S.
      9 August 2019 @ 14:41
      Negative bond rates can also reflect the safety trade as well as rates going even lower in the case of German rates. Very complicated to tease out the magnitude of each different reason. Negative rates are a new world for all of us. DLS
    • DR
      David R.
      16 August 2019 @ 01:20
      @David S ..... or a "false" safety trade. Owning debt that is owed by a bankrupt entity like a sovereign hardly seems safe. Virtually every nation in Europe has routinely defaulted on its debt in history. And even if they don't renege, then they'll soft-default with money printing like how the US will be doing starting 4Q with QE, before going Weimar-like not long after with MMT or whatever. Thus the real safety trade is gold and silver. Their 0% yield is way better than negative rates, and their surging price appreciation is leaving every other asset class in the dirt, on a 1-year, 2-year and even 20-year basis. US stock indexes are negative return since the start of 2018, and gold trounces stocks as well since then, as well as for those aforementioned time periods. Gold is money. Dollars, stocks, bonds and what-not aren't. You know.
    • WM
      Will M.
      17 August 2019 @ 18:41
      I think you are both right. DLS correctly points out that the market is moving to these absurdly low yields or negative real yields because they have concerns about anything yielding even a small positive spec. DR is correct in that at some point possibly soon this will reverse and that process will likely be more rapid than the current one propelling money into hard assets to desperately try to maintain value. Gold and even silver are still relatively small markets with 100s% upside.
  • LC
    Liliana C.
    8 August 2019 @ 02:11
    Was a bit shocked about Chris’s comment on Japan buying Treasuries in bulk if China sells them in light of what other RV strategist in Japan said about the regional banking problems there that are causing Japan to sell US Treasuries in order to avert bankruptcies by these banks. Can Chris watch that interview and comment?
    • DR
      David R.
      16 August 2019 @ 01:25
      Being Asia based (Singapore), I can 100% assure you that nobody is buying any treasuries overseas periods. Pension funds etc won't touch them and have bought zero ever since the cost to hedge the Weak Dollar (which has been plunging against most currencies in Asia this year from Yen to Baht) exceeds the interest coupon of the Treasury. And now far exceeds it as Singapore FX futures, the 3rd largest FX exchange on earth and also where almost all Asian FX trades against USD, are now forecasting and pricing a dollar collapse ahead. Also, the Treasury TIC report shows that few foreigners buy US Treasuries anymore. Probably for the reason(s) above.
  • DR
    David R.
    16 August 2019 @ 01:10
    I'm not US but I've long greatly enjoyed Mr Whalen's work and I definitely recommend subscribing to his Institutional Risk Analyst report, which naturally focuses on his US base but also touches on many corners of the world. High quality material including analysis you may not find anywhere else.
  • WK
    William K.
    13 August 2019 @ 01:42
    Chris brings a lot of common sense to the subject of banking. Creative, clear and consistent. His blog is a must read for those following banks and system-wide liquidity. Bank funding costs are definitely rising on an absolute $ and % y/y. Fed is cutting rates, but funding costs are not falling (yet). Community banks can't cut deposit rates in lock-step with Fed funds because deposits will walk out the door. Loan pricing is competitive and at silly-low levels. "If rates fall too much, banks simply won't lend." Banks are a buy only after the recession starts and loan-loss-reserves ratchet higher.
  • ml
    michael l.
    10 August 2019 @ 17:18
    Excellent presentation - insightful and educational, and timely. More of Chris, please! Similar sector overviews (e.g., retail, industrial, aerospace, etc.) from similar highly-experienced pros would be great
  • FB
    Floyd B.
    7 August 2019 @ 21:06
    Good interview,common sense and clear. However,quoting Kevin O'Leary not a big plus for me. Also kind of wondering where this advertising model RealVision has will lead too,particularly for paid subscribers.
    • DS
      David S.
      9 August 2019 @ 14:48
      Building other sources of revenue has been a benefit to regular subscribers as the subscription price has come down. If RVTV were acting like a charity, I would question its future. I like the continued entrepreneurship of RVTV. DLS
  • MM
    Mike M.
    8 August 2019 @ 22:33
    More of this please
  • SG
    Sven G.
    8 August 2019 @ 17:32
    Its great to hear someone who clearly knows his stuff, back to front. Thanks Chris.
  • RM
    Ryan M.
    8 August 2019 @ 12:57
    If you don't read Whalen's blog, you're missing out! Good stuff!
  • VL
    Vid L.
    8 August 2019 @ 10:28
  • AA
    Aaron A.
    8 August 2019 @ 03:41
    Cost of funds are falling not rising! Fed just started easing and he’s on record saying COF are rising, don’t get it? Also, has he not seen money market rates lately or even over the last 6-12 months. They are falling across the board, large to small banks. Spreads are compressing, and have been for some time now due to the amount of liquidity in the marketplace (banks, insurance companies, PE, etc), but don’t confuse that with COF.
  • DS
    David S.
    7 August 2019 @ 19:17
    What a difference a few days make from August 2 to August 7. DLS
    • Hv
      Hannah v.
      7 August 2019 @ 23:54
      Hi David, I’m trying to put on the eurodollar futures trade Raoul’s been talking about. He talks about doing it two ways: buying the futures outright, or putting call on the futures. I roughly understand the general dynamics of the trade, but I’m a little confused on the logistics of how to put the trade on as I’ve never set up a margins trade before. I’ve set up a margins account. I’ve decided to reach out to you because of the caliber and frequency of your comments, and you seem like a knowledgeable fellow. If you’d rather not reply, that’s fine as well. No hard feelings! :) Here’s my junk email address: saltpony904 @gmail•com. Please message me there if you’d like to continue the conversation. Thanks in advance, Hannah
    • DS
      David S.
      8 August 2019 @ 01:35
      I would love to help you and thank you for the compliment. I do not trade options. If I were younger I would give it a try. Options are where the action is, but is the deep-end of the pool. Options can pay off really well or they can go to zero. I would suggest that you start studying and speak to your broker about how to learn. Wade in slowly so you can manage the trade as time passes. On RVTV you are able to see how smart the pros are that you will be competing against in real time. That is why I am out of the option market. I am better at walking down to the beach and checking out the surf. Best of luck. Aloha.
    • Hv
      Hannah v.
      8 August 2019 @ 02:26
      Thanks for the reply David. It’s awesome you answered, particularly, “how smart the pros you’re competing against..”. I guess it’s not as simple as closing of the trade just before the contact is up. Enjoy the sand and surf, and thanks again for the reply! Hannah
  • dm
    dude m.
    8 August 2019 @ 02:08
    I remember watching him a few years ago, on the Keiser Report. The guy is awesome. Thank you Real Vision for introducing your audience to this guest. I like the format, too. No interviewer.
  • AA
    Aaron A.
    7 August 2019 @ 17:23
    Not sure I’m following why cost of funds would be going up? Rates are falling, though primarily on the long end as of today, but as the Fed continues to cut rates the cost of funds to banks will go down. Cost of funds as a % of total expenses may be creeping up and net interest rates being squeezed by competition, but on a nominal basis cost of funds are going down.
    • LC
      Liliana C.
      8 August 2019 @ 02:07
      I think he’s saying fed funds,shower end has not been cut as that’s their funding costs. Long end has come down and the competition is stiff so spread is compressing
  • NR
    Nelson R.
    8 August 2019 @ 01:12
    Great interview, Chris is very insightful. Nice job lads.
  • SA
    Stephen A.
    7 August 2019 @ 21:04
    Whalen is the best. One of my favorite guys and this was a fantastic interview! There are so many gems in this. Outstanding! My favorite: "Credit doesn't cost anything. FED boosted asset prices so much that if there is a default, they just sell the collateral and make money"
  • DS
    David S.
    7 August 2019 @ 19:49
    Does Mr. Whalen, or anyone else, know how much major credit card US banks make from credit card late fees and penalty interest? With some penalty interest rates around 20%, this may be a significant revenue stream. DLS
  • SM
    Sarit M.
    7 August 2019 @ 15:52
    Great to have Chris back. I always learn so much from him.
  • JA
    John A.
    7 August 2019 @ 13:29
    I would love to ask Chris a question- Does an inverted yield curve just presage a recession, even in the past? I think the inverted yield curve is the CAUSE of recession. As Chris highlighted, the cost of funds can squeeze bank profitability, since lending rates are so competitive. When the yield curve inverts, banks pay more in deposits than they receive on loan income (oversimplification), so they stop/ slow lending. Our economy runs on credit, so if you turn off the spigot, the economy slows. I don’t hear many people exhibit an understanding of this, and even Chris mentions cost of funding, but doesn’t necessarily equate a negative yield curve to predicting recession. I also have my doubts in this environment, since we have the lowest rates in the history of humanity, things may not exactly work the way they always have. Trying to manage money in Jim Grant’s “hall of mirrors” has never been tougher. We’ve been dealing with bad news as good news, and visa versa for ten years. Is this just the state of managing money at the ends of fiat, in a Fourth Turning?
    • EH
      Edward H. | Real Vision
      7 August 2019 @ 15:29
      Ed Harrison here. You make a really good point. So I asked Chris about it and he told me you were spot on. He also added that the structural normalization of rates these past two years has created a squeeze that is increasingly painful for banks.
  • ZD
    ZHAO D.
    7 August 2019 @ 15:13
    Great content and excellent guest.
  • sr
    stephen r.
    7 August 2019 @ 09:37
    Eloquent and informative. Great content .
  • PJ
    Peter J.
    7 August 2019 @ 08:13
    Used to read Chris's posts on Financialsense years ago. Forgot how good his thinking and clear presentation approach is. Excellent interview, would like to see him back.
    • EO
      Elena O.
      7 August 2019 @ 09:10
      Agree. Very clear thinking and good explanation. I like fixed income as its a macro topic.