• Our Favorite ETF Ideas: Get 30-Days Free

    Get 1-month of completely free access to “ETF Pro Plus” – our Macro team’s monthly strategy note distilling our macro investment research down to our favorite ETF exposures.

Takeaway: This webcast originally aired on May 7, 2021. Replay and transcript are available below.

Dear Hedgeye Nation,

We are excited to bring you another heavy-hitting macro-dose of financial insight with our newest Real Conversation on HedgeyeTV. Hedgeye CEO Keith McCullough will be joined by renowned banker and author Christopher Whalen.

Chris has had a storied career on Wall Street, and now uses his expertise to pull out high-level insights from the nitty-gritty of Macro; this is an analytical range you won't find anywhere else.

Please enjoy the entire hour-long interview below. We’ve also transcribed key excerpts from the eye-opening conversation between Chris and Keith for your convenience.

* * *


Whalen: The economy has been disrupted in such an extraordinary way that the averages that most policy makers look at are useless.

Most of these indices are never really meant to be true representations of what's going on in the economy. It's tough for the Federal Reserve because a lot of the data they look at, the "data-dependent Fed", is not helpful.

So, they're flying blind.

McCullough: One of the biggest questions I get is, "Why do they define inflation this way? It's not what's going on in our business, it's not what's going on in the economy." And he was asking me for different ways to look at it. What I said was one easy way was to track real-time commodity prices.

That's one part, it's not all of it. What is it that you pay attention to all day long when you're trying to bean count?

Whalen: I spend a lot of time on the housing market (and I'm actually renovating a house at the moment) and one of the things I've noticed of contractors is that they're moving away from firm-fixed pricing to time plus materials. This is because they can't control materials prices right now; and this means that those price increases that are flowing through the channel are going right to the consumer.

And this is non-monetary inflation, this is something the Fed can't control.

So when they're trying to fine-tune the economy, which is a fool's errand, they have no idea what's going on. Again, they're flying blind.

The monetarist definition of inflation is actually what we use, even though nobody likes monetarist economic theory. There are so many ironies in this discussion that it'd take us all afternoon to get through them, Keith. But the bottom line is that the Fed is a backwards looking agency.

Economists take their whole career to build their credibility, so when you tell them that the data has changed, and they need to make a change in their analytical methods, they don't want to do that.

Because it would mean they would have to throw away their entire career. 

McCullough: Well most of them are what we call linear economists. If you're a linear econ, it's all these nice linear charts, supply & demand models, this equals that. There's nothing to do with the non-linearity that is inflation.

I've actually heard people on Wall Street this year say, "Oh that move in bond yields is non-linear." Moves in bond yields are always non-linear when inflation isn't linear!

But there's nothing that's going to change the institutions that is linear economists. 

Whalen: That's right, they're not going to let go of a lifetime of work. If you tell them that things have changed, they have a problem, because then they're no longer relevant.

This is the problem with having economists on the Board of the Federal Reserve to make policy. We should have economists work for the Fed at a staff level; but actually putting them on the Board to make policy is a terrible mistake. 


Richard Christopher Whalen is an investment banker and author who lives in New York City. He currently serves as Chairman of Whalen Global Advisors LLC and focuses on the banking, mortgage finance and fintech sectors. He edits The Institutional Risk Analyst newsletter and contributes to other publications and forums, including as contributing editor at National Mortgage News. He is a member of FINRA and Senior Advisor at J.V.B. Financial Group in New York.

Over the past three decades, Chris worked as an author, financial professional and journalist in Washington, New York and London. He has held positions in the House Republican Conference Committee, the Federal Reserve Bank of New York, Bear Stearns & Co., Prudential Securities, Tangent Capital, and Carrington Mortgage Holdings. From 2014 through 2017, Christopher was Senior Managing Director and Head of Research at Kroll Bond Rating Agency, where he was responsible for ratings by the Financial Institutions and Corporate Ratings Groups. He has testified before Congress, the Securities and Exchange Commission and Federal Deposit Insurance Corporation. Chris appears regularly in such media outlets as CNBC, Bloomberg, Fox News and Business News Network. 

Christopher holds a B.A. in History from Villanova University. He is the author of three books, including his most recent work "Ford Men: From Inspiration to Enterprise" (2017), a study of Ford Motor Co and the Ford family published by Laissez Faire Books. He is the author of "Inflated: How Money and Debt Built the American Dream" (2010) published by John Wiley & Sons; and co-author of "Financial Stability: Fraud, Confidence & the Wealth of Nations," also published by John Wiley & Sons.

Christopher has served on the Economic Advisory Committee of FINRA for over a decade. He served as an advisor on Season 5 of the SHOWTIME series "Billions." Chris is a member of The Lotos Club of New York. He previously served as a fellow at Indiana State University (2008-2014), a member of the Finance Department Advisory Council at Villanova School of Business (2013-2016) and board member of the Global Interdependence Center (2017-2019).