Yahoo Finance’s Adam Shapiro and Chris Whalen, Whalen Global Advisors Chairman, discuss the Fed’s decision to keep rates unchanged.
ADAM SHAPIRO: We're going to invite into the stream Chris Whalen. He is Whalen Global Advisors chairman. Chris, it's good to have you here. Several years ago, I would have said I was the king geek because we're talking about basis points, one or two basis points movement in the 10-year. And we are still at levels on the 10-year yield that, I mean, just a year ago, we would have said, wow. I mean, we were at 1.9% I think it was on the 10-year going into the pandemic. We're still below that.
So all of this, I'm going to use the word kerfuffle, over the bond vigilantes-- is this a lot of wasted energy? And then I want to dive deep into some things you've pointed out about the pressures with the banks.
CHRIS WHALEN: No, it's not. Look at the dollar. You guys were just discussing it. It has a huge impact on foreign demand for US treasuries. We just got through a month of very difficult auctions. And I think that the thing that really surprises me is how many economists just assume that the Treasury market is going to continue to function as it has in the past and that we don't have to be concerned about things like yield curve control.
I was really glad to hear Mr. Levin say that we're not going to see that, because I think that would be a terrible mistake for the Fed to go down that road. I really do. Not just for the banks, but for the markets. We need a steep curve. And we need to attract investors to make sure that they're willing to hold our paper. And I don't think enough Americans appreciate that.
ADAM SHAPIRO: And so when we look at a recent note you put out-- and you said that bottom line is that another year of QE by the FOMC will do serious damage to the banking industry. I read something like that, but then I hear the $80 billion, the increase on the overnight repo. And the article-- I think it was in "The Wall Street Journal" earlier this week or maybe last week-- that talked about how things were freezing up going into the pandemic, they got that, but now it sounds as if they're trying to signal to us we don't want things to freeze again. Yet they could. How do you interpret all of this?
CHRIS WHALEN: If you let rates go too low, the markets will freeze. You cannot be indifferent to investor preference. And that's what we started to see with both the four-year and the seven-year auction. They didn't show up. The dealers ended up with half of the paper. So, you know, we got to understand that when volumes fall, you have behaviors that start to come into play. When you have a bond market that's largely principal-only securities, what do you have? They're very volatile. And the liquidity and the volatility are totally correlated.
So, you know, we need to understand that quantitative easing and low interest rates by the Fed have a terminal point where, after that, they're not beneficial. Banks today, if you measure the income they make on their assets, they make about 70 basis points on earning assets. They've lost 15 basis points in the last year. So if we lose another 10, I think you're going to see the basic profitability of US banks come into question.
ADAM SHAPIRO: Are investors not paying attention to what you just said, though? Because I've just pulled up Citi. It's trading higher right now. Bank of America's higher. Wells Fargo, Goldman Sachs. Even JP--
CHRIS WHALEN: No, they ran up last year. Their investors are getting half the cash they got from banks a year ago, OK? So they're more expensive in terms of cash flow. Share repurchases, dividends are all much lower. And I think if you look at earnings estimates, people aren't paying attention to that either. The managers wanted to own these assets. They came in and they bought them. So JP, you're right, 1.7 times book. The rest of the complex is where it was a year ago before COVID. And yet, we're getting less in terms of earnings.
I think the real issue is not the first quarter. We're going to see big earnings because of releases from loan loss reserves. But going forward through the rest of the year, I think earnings are going to be tough. And revenues are going to be challenged. You're going to see people missing revenue targets. And by the way, if you talk about growth, if you talk about US economy, what do we need? We need credit creation. But we're not seeing that. We're seeing lending falling.
So all of these things, to me, point to the fact that low interest rates are not necessarily good for the economy. And they particularly are taking the banks out of the game because the big banks can't work for a point and a half gross yield on their commercial loans. They just can't do it.
ADAM SHAPIRO: Chris Whalen, it is--
CHRIS WHALEN: They'd rather just keep the cash.
ADAM SHAPIRO: Go ahead. Say that again?
CHRIS WHALEN: They would-- the banks would rather just keep the cash than putting money into a loan that doesn't make sense.
ADAM SHAPIRO: It's definitely not 2007 or '06, is it? Chris Whalen, Whalen Global Advisors chairman, we appreciate your input on this.