February 6, 2023 • 48 mins
After a decade of dominance, 2022 saw tech stocks badly underperform the rest of the market. However, so far in 2023, tech stocks and other speculations have surged again. According to Steve Eisman, what we're seeing is the natural process by which a "paradigm shift" is playing out in stocks. Eisman, a portfolio manager at Neuberger Berman, won big betting against CDOs during the Great Financial Crisis and was famously depicted in the book and movie The Big Short as one of the few investors who got it right. In this conversation, he talks about lessons learned from his career in investing, how and why big shifts happen in markets, the state of the financial system, and what sectors could win over the next decade.
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Speaker 1 (00:10):
Hello, and welcome to another episode of the All Thoughts Podcast.
I'm Tracy Allowin and I'm Joe. Joe. It feels like
an interesting moment in markets. Yes, I mean there's this
sort of short term obvious stuff that's interesting, like oh,
what's going to happen with the soft landing or what's
gonna happen with the Fed, etcetera. But it also feels
(00:31):
like a pretty big turning point in markets overall. Absolutely well.
To me, it feels like kind of a massive flip
flop from Doom and Gloom two, where it kind of
felt like everyone was talking about the world was actually
ending and suddenly, you know, fast forward to just the
beginning of three, and everyone's talking about a soft landing,
maybe the recession is averted. Markets are up quite remarkably,
(00:55):
including things that got absolutely crushed last year. So some
of the big stocks Bitcoin, I mean, some of the
Chinese companies like real estate and consumer tech companies, all
of those are surging, right, So like there's this hope
right that we let's just go back to or let's
just go back to one, like let's just hang on.
(01:16):
And it's sort of this thing because you know, when
I think of when I think of it was sort
of like the ultimate speculative froth low interest rate environment.
And as as everyone's tired of hearing me say, like
on this podcast, like you know, I, you know, I
first got interested in markets at the end of there
(01:36):
it comes, folks. But I remember like those periods where
it's like, you know, you have like you look at
the NAS deck and two thousand and one or two
thousand and you have like these fifty rallies. It's like
we're back. I don't know, we're back. It's over. And
that process of like I guess a bubble deflating is
like a long process. People are slow to give it up. Well,
that's exactly it, and it sort of happens in fits
(01:58):
and starts. And I'm glad you meant shined the keywords there,
which are bubble and you know, speculation, speculative interest, because
today we are going to be talking to someone who
is kind of an expert in exactly that and particularly
one period of speculative financial history. We are going to
be speaking with Steve Eisman. He has a portfolio manager
(02:18):
at New Burger Berman, and he famously bet against subprime
mortgages before the two thousand eight financial crisis. Of course,
you might recognize him from the movie The Big Short.
He was played by Steve Carrell. So really the perfect
guest to talk about markets right now. Perfect, let's do it,
all right, Steve, thank you so much for joining us,
Thanks for having me. So where should we start. Maybe
(02:41):
give us just your top line opinions on where markets
are right now. Um, there's gonna be a long intro. Okay,
that's fine. People are gonna look. So I remember back
in college, one of the most influential books I read
was a book by Thomas cune Cole, The Structure of
Scientific Revolutions. He invented the modern meaning of the word paradigm,
(03:05):
and the point of the book was that science paradigms
change over time. Sometimes those paradigms changed violently, and sometimes
those paradigms change over time because people don't give up
their paradigms easily. And I think we're going through a
period possibly like that again. So you know, markets have
(03:27):
long periods of paradigms where there are certain groups that
are leaders. So in the nineties, for example, it was
largely i'd call it large conglomerates like ge was what
people made money in and wanted to invest in. And
it lasted about eight years until there was a small
(03:47):
period of the dot com bubble, and obviously that ended
and there was a recession, and after that, really through
two thousand and seven, the new paradigm and just to
take a step back, when you know what market paradigm shift,
it's unusual that the old leaders become the new leaders.
There's a shift, and there's there's a new leadership group.
(04:08):
And you know, one of the most important leadership groups,
i'd call it, from two thousand and two through the
end of two thousand and seven were financials, you know,
largely invests in banks, very large banks, where the opinion
of the market was the people who ran these firms
were basically geniuses until they weren't. And you know, we
(04:29):
had a violent period in two thousand and eight and
two thousand and nine where those stocks got crushed. Almost
all of them would have gone bankrupt unless the government
bailed them out, which it did. But you know, financial
stocks that did well in the two thousand's did literally
nothing until probably two thousand and twenty, So call it
(04:52):
a dozen years where the old leadership group evaporated and
it was replaced by new leadership group, and that leadership
group was tech and growth stocks. And I think the
reason for that is that the FED cut rates essentially
to zero and kept them there and so you were
essentially paid to take risk. And as we all know,
(05:13):
there's a discounting mechanism of stocks where you know, you
plot out the earnings and the lower the discount rate,
the more the stock is worth. So the groups that
the group that did best were growth tech stocks, and
within growth tech stocks, the group that did the best
were the high growth no earning stocks, and that left
that basically lasted until last year. And if you look,
(05:36):
you know it was a bad market last year. But
the stocks that did the worst were the growth tech stocks.
And within the growth test tech stocks, the stocks that
did the worst were the high growth no earning stocks,
down generally anywhere from seventy to you know, it's a
crushing percentage, but like I said, you know, people don't
(05:56):
give up paradigms easily. And so so far this year,
the stocks have that have done best were the same
socks that did the worst. And you know, if you
go back to two thousand and nine through early two
thousand and ten, financial stocks had their last hurrah, you know,
Goldman Morgan Stanley had said it did very very well
(06:18):
until you know, Dodd Frank was passed and they had
to deliver, so they had kind of had a last hurror.
And maybe this is the last hurrah right now for
growth stocks. Possibly, And I think it'll all depend pretty
much on the FED. You know, Powell has said that
he's going to keep raising rates and the important sentences
(06:38):
and he'll leave them there. If he leaves them there,
I think we'll have a paradigm shift. If he cuts
it again, we'll go back to what we were, which
is growth stocks. I mean, I think he's going to
leave him there and then we'll have a paradigm shift.
But it's unknowable at this point, you know. Like I said,
paradigm shift can be very violent. They take time. I
think we're in the middle of that right now. And
(07:00):
like I said, it's unusual when you shift to new
paradigm that the old leaders become the new leaders. What
the new leaders will be assuming this happens at this point,
I don't really know, you know, Joe, I'm looking at
the Bubble portfolio, which was created by another all thoughts
guest Paul McNamara and basically has a lot of the
stocks that Steve was just talking about up so far
(07:23):
this year. Tracy was created by Paul and me. Oh,
I'm sorry, I co I co created. I'm so sorry.
Port By the way, some of those stocks are up.
It's pretty it's astonishing now they're up fifty from very
low levels. You know. Take I'm not picking on them.
Take a stock like a firm which is a buy now,
(07:44):
pay later company, really a financial company. I think it's
up sixty sent this year, but it's up sixty percent
this year after being down basically, so I think it
closed last year around eight and it's it's fifty, but
it used to be I don't remember a hundred, two hundred,
whatever it was. Yeah. Another one of these ones that
(08:05):
I've been watching is an open Door, which got below
a dollar at the end of December. Now so like
more than a double, but that was like a twelve dollar.
That was a spack, I mean, so it's incredible beat down.
And then this sort of about what is that process?
You know, you talk about this sort of like the
giving up the dreams and the process by which people
(08:26):
aren't sure it's it over? Is it not over? We
don't want to change the paradigm, just in the sort
of like how do you talk a little bit more
about like how that happens? What that how that process works? Well,
it takes time, you know. I would recommend everybody read
this Thomas qun book. It was published the year I
was born nineteen sixty two, which is I guess revelatory
for me. But but what he describes is, like I said,
(08:51):
people don't give up their paradigms easily. When when Einstein
created his theory of relativity, for example, this is in
the book, is out like everybody said, Oh we've been
waiting for Einstein. Thank god, now we can get rid
of Newton. You know, people, it took several years for
people to realize that that was a better theory. I
think something like that happens in markets. You know. Paradigms
(09:15):
in essence are so deeply ingrained in people's brains they
can't even imagine at times that there could be anything else.
And so, like I said, since paradigms, people don't give
up their paradigms easily. The only thing that gets people
to give them up is time. Now, the financial stocks
(09:36):
that was quick because they utterly collapsed. But that's unusual.
It's not like it's not like in the nineties the
conglomerates collapse. They didn't collapse. Their earnings growth slowed, and
you know, people expected the earnings growth to re accelerate
and it didn't. So, you know, take Ge. You know,
(09:56):
Ge was a star for almost all the nine d
s and then when Emil took over just before nine eleven,
it's deteriorated. You know, one of probably one of the
best trades in the world would have been owning Amazon
and shorting g Right. You know, it's funny, Tracy, I
actually went I mentioned open Door. I got it kind
(10:17):
of wrong. I said it was at twelve and it
was a thirty five dollar stock that went to a dollar.
So I was sort of understating the scale of the collapse.
But more importantly, let's talk about open Doors. Let's get
right into it. So open Door had a business model
where they would buy homes, fix them up, and try
(10:38):
to sell them quickly. Now, when you think about it,
that business model only works if housing prices are going up.
If housing prices are going down, it's a disaster. Um.
So I never thought it was a real business model.
It was a timing model. And I think the reason
why the stock got crushed last year is because, I mean,
(10:59):
housing hasn't collapsed in the United States, but it's kind
of locked and housing prices have gone down, so it's
hard to sell and be you're selling for less, and
that's why Open Doors down so much. But you know
what it came out. It was another one of these
speculative going to conquer the world stocks until it wasn't.
(11:35):
I definitely want to talk more to you about housing
and real estate in a second, but just on the
paradigm shift. You know, when I think about the paradigm
of the past couple of years, you mentioned low interest
rates and that helping to boost valuations, but I also
think about momentum and people just identifying the thing that
they think other people are going to buy and then
(11:55):
pouring into that and so having a lot of valuations
driven by flows. Can you talk about that behavior in
the market. I call this what I call it this
the Amazon disease. I'm not saying Amazon is a bad company.
It's a great company. What I mean by the Amazon diseases,
you know, and when Amazon came public, there was a
(12:18):
lot of skepticism that this work. And Amazon has basically
conquered the world, and so people are always looking for
the next Amazon. And you know that they're looking for
the next Amazon when they just when they write when
when the cell side writes a research report and the
first sentences the TAM is huge, which means the total
(12:40):
available market is huge. Well, you know, take open door again.
Housing is huge. I mean, there's no question that housing
is huge. But that doesn't mean people's business models are
going to conquer housing. But people are constantly you know, again,
when rates or zero, you're paid to speculate. So you
(13:00):
look at open door and you say, well, the housing
market in the United States is I don't know, a
trillion to whatever, it is a trillion to trillion. If
open Door only gets one cent of that market, the
stock is huge. And as long as revenue growth is strong,
people are willing to make that bet. When revenue growth
(13:22):
starts to slow, they they get they don't think about
the TAM anymore. They start to think about the business model.
So you know, in two thousand and ten through tooth
beginning of two thousand and twenty two, if you were
a company that had no earnings that strong revenue growth,
people dream the dream. When the revenue grow slows, people
(13:45):
stopped dreaming the dream. Or combination of that with higher
rates and the discounting mechanism takes down the stock. You know,
even companies that did well last you went down because
of the discounting mechanism. So let's say we are at
this paradigm shift and we don't know what it's gonna be.
We don't know what it's gonna look like, but something
(14:07):
that's not speculative tech will be the new leadership, presumably
for a while. As an investor, like, do you feel
like you can wait and sort of see what it
is and like let the market kind of decide, or
do you feel like an impulse to try to anticipate
today what that thing. I think you anticipate a little bit,
you know. So, for example, I think one of the
(14:29):
themes for the next several year is what I would
call the ressoring of the industrial world back into the
United States. So, you know, for the last call it
thirty years, companies have essentially sent their supply lines out
to the inside the United States because labor in the
(14:49):
United States is expensive and labor in China and Vietnam
is cheap, and that worked for a very long time,
and it was very deflationary. And COVID proved one thing. Yes,
that supply chain is less expensive, but it's also very brittle.
And because of what happened during COVID, people are companies
(15:13):
are bringing back the supply chain, at least partially back
to the United States. So, you know, stocks that haven't
done anything in twenty years, let's say, might start to
do well, like b HP, iron ore, etcetera. That's one
theme that I think will last a long time. Greenisfication
(15:34):
I think will last a long time. Although some of
those stocks have no earnings and high revenue growth, I
never quite know what to make of them. But there
are other ways to play the same theme. You know,
their companies I won't mention any names, but their companies
that are that are well, let's call them normal, that
(15:54):
are helping rebuild the infrastructure of the United States and
the electrification of the United States, etcetera. So those are
things you could start to look at. So that's actually
something that we've spoken quite a lot about on all
lots of this idea of a sort of shift from
I guess ephemerate tech software to the reality of actual things.
(16:16):
This might be a slightly weird question, but do you
think investors are well positioned or well informed to grasp
that shift, because I imagine there must be a fundamental
difference between looking at a tech company versus say, I
don't know, in an oil major or something like that. Oh,
I don't think people are prepared yet. You know, they've
owned tech stocks for so long. You know, they look
(16:39):
at revenue growth, they look at e v D. But uh,
you know, one of the things that I find astonishing,
for example, about tech stocks is they don't include stock
based compensation and earnings, which I just find a little weird.
And because I would always ask, do you deduct stock
based competence? Stock based come from your taxes? And the
(17:02):
ends to that is always yeah, So in that sense
it's real, but when the report earnings, they pretend it's
not real. But the market doesn't seem to care. But
I think it's going to take time, you know, like I,
like I always talked about before some of these very
speculative stocks are up this year, it's going to take
time for people to start to do I think research
(17:25):
on other stuff. I know you weren't investing yet at
this point. But you know, as a student of market history,
was there the same process like with the like earlier
tech bubbles, like in the sixties, with the aerospace stocks
and some of those other waves. I mean, I was
in great school, and that's what I'm saying. No, I
figured out. But I although the two of you, I
don't think we're alive back then. Um. You know, I
(17:48):
think if you look at economic history, probably it's true.
I haven't really looked at that much. But you know,
in the in the late seventies, the group that people
wanted to own work whil stocks. Oil stocks haven't done
well for god knows how many years until basically the
last two Now let's talk about old stocks for a second.
(18:09):
You know, pipeline stocks, oil stocks. You know, why did
they do so poorly? This is not a paradigm shift.
This is a shareholder's revolt issue. So you know, if
you look back, call it two thousand and ten through
maybe two thousand eighteen or so. And this is where
I would say incentives trump ethics every time. So the
(18:32):
people who ran these companies where it was the midstream
pipelines or the drillers the c e O s of
those companies were all compensated essentially on volume, so it
didn't matter whether the oil prices with thirty or they're
all prices were eighty. They kept growing their production and
(18:53):
in most cases they basically never made money whether oil
prices with thirty or prices were eighty. And at some
poll point, probably around two thousand and sixteen, when the
group got crushed, I think that the shareholders literally revolted
and they went to these managements and said enough and
you have to change your compensation to R O E, etcetera.
(19:14):
And the stocks have done pretty well since that, especially
in the last two years, because the way they operate
now is they basically planned their business models for oil
prices as something like fifty to sixty, and if oil
prices are above they return the money to shareholders, which
is one of the reasons why despite the fact that
(19:35):
all prices were so high last year, those same companies
did not increase their production that much. Now, some people
accused the Biden administration of this. I don't think it
has anything to do with the Biden administration. Has to
do with the change and incentive structure for these companies.
Incentives trumping ethics is such a good line and I'm
(19:55):
definitely going to steal it from you at some point, Steve,
you can play giarize. You don't even a the quotemak.
Thank you. I think I appreciate that, um I have
a full license on that line. You know, given your background,
I think we would be remissed to not talk a
little bit about financial risk and financial stability. And this
is something that has come up over the past year
with the FED raising interest rates so rapidly, and yet
(20:18):
we haven't actually seen a significant break Is the system fixed?
Is it just not going to come that big breakage
that you know some people have been anticipating for a while. Well,
I can't say that they won't be breakage any anywhere
that I mean, there always could be breakage. What I
would say definitively is that there will not be breakage
(20:42):
in the US financial system, especially in the banks. We
can owe that to one person, which is Daniel Tarullo,
who was the first Vice Chairman in charge of Financial
Supervision at the FED, which was a position that was
created only from Dodd Frank and he was given the job.
(21:03):
Although it's funny he was never actually officially appointed to
the job, because you know, it makes it. He'd have
to testify in front of the Senate. It would have
been difficult, but he he was essentially given the job anyway,
and he really took the banks. He was very harsh
what he did to them. The banks objected to literally
(21:24):
kicking and screaming, but today they probably all thank him.
There are two things that he did. He reduced leverage
in the banks enormously, and even within that leverage, he
made them cut off the tails of risk. So, just
to give you an example, City Group before the crisis,
(21:46):
if you included all the off balance sheets stuff that
eventually came back on balance sheet, it was probably levered
anywhere from thirty five to forty to one, and by
the time he was on it was lever tent to one. Now,
for listeners, that may not mean that much. You know,
(22:08):
forty to ten, you know, those are just numbers. But
the way I would describe it is, when you're levered
forty to one, to destroy the bank, you need a pebble,
but when the bank is levered ten to one, you
need a meteor. So now we could have worst credit
(22:28):
in the United States, Although that really hasn't happened yet,
So under those circumstances, the banks would earn less. But
I would say other than a couple of banks, not
one bank in the United States will lose money. M hm.
I seem to remember, weren't you one of the few
people that read all of Dodd Frank from like front
(22:50):
to back. I think it was two thousand pages? Or well,
that's not true, that's a myth. Okay, So you're talking
about finding controls stability, but you know, we also touched
on real estate earlier, and again, you know, you you
sort of characterized the housing market it's kind of in
a freeze. Maybe it's already stabilized a little bit, but
(23:11):
with rage having shot up so much, I mean, like,
how are you thinking about like housing and where it's
going to go? And can like, can it stabilize with
such a repricing of mortgages in a short period of time? Um?
I mean sure it can reprice, it takes time. I
did a small calculation when mortgage rates got to seven,
which was if you calculated the monthly payment of someone
(23:35):
who bought a home with a three percent mortgage versus
someone who wants to buy the same home at the
same price with the same mortgage at seven percent. For
that person to have the same monthly payment as the
person with a three percent mortgage, the price of the
house has to go down from now. As long as
(23:58):
people are employed, they're not going to sell their home down.
They'll just live in their home. So housing prices have
come down some, but it's still the case I think
that the housing market is locked. Let's say you want
to you have a small home. You got a couple
of kids now, so you want to sell your house
(24:19):
and you want to buy a larger house. You can't.
You're stuck, so you're buy bunk beds. But well, it's
nothing wrong with that. But not only is housing locked.
You know, building suppliers have you know, less ability to
sell their products because housing is not turning over. So
(24:41):
that would be a short area. But I'm not going
to give you any names. So this is actually something
that I've been thinking about a little bit, which is
house prices are sort of being supported by a liquidity
at the moment right And I don't think they's supported
by a liquidity. I think they're being supported by employment.
You know, Like I said, if if you're you have
(25:01):
a three percent mortgage, so your monthly payment is very
very low. You have a job, you don't have to
sell your house. You're just not going to sell it
down a lot, so you just sit there and hope
that eventually people will get used to a seven percent
mortgage and you can sell your home. But that can
take a long time. That's fair. What I was going
to ask about is recent events that we've seen with
the Real Estate Investment Trust. And we're recording this on
(25:24):
February first, Blackstone just announced that it hit a monthly
redemption limit. Is there going to be what was the number?
Did they say, okay, that was in line with people's expectations.
I think it's not a great number. And they have gates,
so I forget what the number is, but you can't
(25:44):
withdraw five billion in a month. It's probably I don't know,
five millions something like that maybe, so you know, they
have gates. But this is kind of where I was
going with a liquidity point, right. I mean, you know,
let'st's talk about the black drown you know, private read.
So I'm not being critical to Blackstone, but when when
(26:05):
you think about the structure of that read, it has
what i'd call an asset liability mismatch, meaning you're investing
in real estate. Those investments could be good, but they're
a liquid so it's not like you can sell a
building overnight, but your your liabilities, meaning your investors, can
(26:26):
withdraw money every single month, so if the withdrawals get
too bad, you can have to sell some of your
real estate. Now, Blackstone has a very good reputation, so
it might be fine. But I think what happened last
year with that it's called the be read, is that
about of the Breads investors were from Asia, and those
(26:48):
Asian investors got from some investment banks enormous leverage to invest,
and given what the markets did last year, they got
margin calls and they to, you know, withdraw money from
Blackstone to pay off their margin calls. Now, how much
more that's going to take place in the next several months,
I have no idea. So we talked about how investors
(27:26):
leave the old paradigm kicking and screaming, But I'm thinking
also about scars from the past. And I feel like
people listening to here like there's some liquid fund and
there's some margin call, and there's this real people ganking
their money out and they're like, they reached for the
two thou seven playbook in their minds and the two eight.
To what degree do you think memories of that crisis
(27:49):
are still informing how investors think about and try to
assess the market today. Oh, I think two thousand and
two thousand eight for some investors is like PTSD. Look,
financials are implicated. There aren't a lot of people on
planet Earth who really understand how much the financial structure
of the United States and Europe has really changed. So
(28:09):
they see they see the markets go down, and they
say to themselves, oh, my god, something bad is going
to happen. Now, something bad could happen. You know, we
could have a recession. But my feeling is will have
an old fashioned run of the mill recession. We're not
going to have some enormous, you know, meltdown crisis where
(28:29):
the system is completely at risk, which is what happened
in a way before you forget I mean you use
the pebble versus meteor analogy. Can you just explain, like,
what is it about the nature of US banks? Now
there you say they cannot lose money, Well, you're level
at forty two one. You know what happened in the
financial crisis. One of the things that's very important, and
(28:53):
getting back to my line which I've donated to you,
incentives trump ethics every time, is there there's a concept
called risk weighted assets where the system, you know, the
regulatory system, tried to merge the concept of leverage with
risk and so every asset on the balance sheet got
(29:13):
a risk weight, and so when regulators and companies calculated leverage,
it wasn't assets divided by equity, it was risk weighted
assets divided by equity. So if you look at Europe,
for example, where you know the banks are much more uniform,
from two thousand and seven, I'm sorry, from through two
thousand and seven, absolute leverage in the banks in Europe
(29:36):
went up three times, but on a risk weighted asset basis,
they were flat. So a lot of the executives who
ran these companies, when they looked at their balance sheet,
they said, oh, our leverage is the same when an
actuality was much higher and they had a lot of
risk on their balance sheets. They had a lot of
subprime assets of various kinds, which all blew up in
(30:00):
their face. And so because they were levered so much,
they essentially died. The only reason why they survived because
they were bailed out. So today, not only is the
absolute leverage lower, like I said, City has come from
thirty five to forty times too went to ten. Maybe
today it's twelve, but the type of risk that they take,
(30:24):
generally speaking, is far far lower because the regulators who
essentially live in these banks are not allowing them to
take enormous types of risk in their loan books. So look,
the system, like I said, is probably safe for the
first time in my lifetime in that sense, But I
(30:44):
don't think a lot of people really understand that that's
the case. You know, you mentioned investors getting PTSD from
two thousand and eight, and it's sort of informing and
affecting their subsequent behavior. And I don't think you got
PTSD because you made a lot of money out of it,
but it was a defining moment of your career. How
did you yourself move past that particular era? And what
(31:09):
I mean by that is there are people out there
who made a lot of money in two thousand and
eight who subsequently every year had been issuing warnings about
how the entire market is going to fall apart. The
financial system is going to collapse. How did you move
past that? Great question? A lot of therapy? Uh no, no,
I I where I got past it was well, I
(31:32):
actually got friendly with Daniel Torulo, so I watched what
he did very very closely, and you know, I realized
that what he'd accomplished was actually astonishing, and so the system,
you know, was fine. What what I didn't anticipate until
years later was that because the FED cut rates, you
(31:53):
were paid to take so much risk, you could do
what you wanted to do was buy companies with no earnings.
That was much harder to make that shift. But I
didn't think that the financial system was going to go
down again. Yeah, it really is extraordinary, Like how I
mean you see it's still you know, like what was
it credit sweets a few months ago? Like people are
just not able to get past this sort of like yeah,
(32:15):
great financial I wasn't going to name any names job,
nobody was just like people were like it was in
the headlines and stuff, and you know, people just like
reach for those old analogies. So just looking back at
your career, you know, you're very long and illustrious career,
But what was your flattering Yeah, what was your most
shocking moment, Like what surprised you the most, Whether it
(32:38):
was a company that you know failed or maybe succeeded,
or the particular behavior by someone or an entity. Well,
what surprised me the most was what happened in O eight.
I thought that surely the regulators knew what I knew.
(32:58):
How could they not because they had much more information
than I did. And it became very very clear as
OH eight went on that they didn't really understand what
was going on until it was too late. And I
remember Bernanke made a speech he said something like subprime
(33:21):
mortgage risk is confined. And I turned to one of
my colleagues and I said, yeah, it's confined. Alright, it's
confined the planet Earth. That's funny. By the way, pay attention.
I'm laughing internally. So you know, when you read um,
(33:42):
I figured the book by but it was a book
that was a very early book about the financial crisis.
And there was a scene where it was the weekend
when Lehman went down, and there was a scene described
in the book where as Lehman is going down, they
(34:03):
know what's going down. Someone walks into the room. I mean,
I'm just paraphrasing and basically says a I G is
also in trouble, and I'm thinking this is a shock
to you a lot, Like don't you read the research?
I mean, I couldn't believe it. But that was the
most shocking thing in my career. I could not believe
(34:23):
that the regulators and the government really had no idea
what was going on. Can you talk a little bit
more about Like, Okay, to make any real money in
the market, there must be some sustained periods where you
have a different view than the overall mark. I don't
think that's necessarily true, you know, oh six oh seven,
(34:46):
oh eight, I had a very different view. Yeah. Is
that hard? Oh my god, it's ridiculously hard. The whole
world is telling you that you're an idiot, and then
sometimes you think you're an idiot. So that's hard. Well,
because like I mean, I've you know, I've been thinking
about that to like a lot of people, for example,
and I don't I don't want to like actually dive
(35:06):
into this specific they went a lot of people for
example of like had to deal with this in the
last year related to cryptocurrencies, where like everyone's calling them
an idiot for like not really getting it and then
maybe they're right. But that process of like being called
an idiot, maybe underperforming or missing some market move for
years and being told like you fool, don't you see
what's happening, it seems like psychologically you mentioned therapy earlier, Steve,
(35:29):
this is where if I had a therapist, I would
talk about abuse from bitcoiners. Well, let's let's talk about
big quarter can mean getting back to do you have
to be different? You know, from two thousand and ten
through two thousand and twenty, if you objected to high
growth stocks with no earnings and you will short them,
(35:51):
you'd basically be dead. So that can last a long
time even though you have a different opinion. You do
not have to have pretty good time to deal with that.
But let's talk about bitcoin. That's a great fun topic.
So I remember during COVID, you know, I was out
on Long Island in the north for basically living there,
(36:14):
and I would come back to the city every Tuesday
to visit my mother, and so I would drive to
the city. There would be no traffic and it would
take me about two hours. So I listened to podcasts.
What else are you gonna do? I even listened to
this podcast every now and and but one of the
group of podcasts that I listened to were the so
called experts on bitcoin. And there are always two questions
(36:39):
that I had. Number one, why is bitcoin a currency?
And number two, Okay, it's a currency, but how should
it trade now? On every single podcast, they completely skipped
over the why is it a currency issue? That was
like that was just a given, and that's not given
(37:01):
to me. We can get back to that, but it
was a given. The second part of the story about
how should bitcoin act, they all had the same opinion,
which was fear currency, which is government issued currency, has
been terribly debased because of all the deficits that all
these countries have issued. But it's very hard to short
(37:22):
fear currency because they all trade relative to one another.
So if you short the dollar, your problem is that
in in a basketball team where everybody's five four, the
dollar is five eleven. So it's hard to short the
dollar because it's it's taller than the other currencies. Even
(37:43):
though quote unquote has been debased. So therefore you should
buy bitcoin as a hedge against the debasement of all currencies. Okay,
so let's accept that theory for a second. If that's
the case, then bitco point should go up when people
are nervous and rates are going up, and Bitcoin should
(38:05):
go down when rates are going down. Every everybody feels good.
And the problem was it actually did the opposite. It
would go up with everything else speculative, and it would
go down with everything else speculative. So what was the point.
So you know, Bitcoin is up a lot this year
because it's up a lot with everything else speculative. Now,
(38:29):
you can't have a currency that moves every six months.
That's not a currency, that's a speculation. And the thing
I don't understand about bitcoin is what problem is it solving?
You know, is there a problem with currency? I mean,
the last time you went to the store and you
(38:50):
you pulled out a twenty dollar bill, you paid with
your credit card, did the store owners say, oh, no,
I don't take dollars. I mean, it's not even an issue.
And by the way, the currency markets are the most
liquid markets in the world. You know, I like to say,
how long does it take to buy dollar? Euro? Done?
A billion dollars done? That's how quickly it is. So
(39:13):
I don't understand what bitcoin solves. And I don't understand
the purpose of owning it other than it's another form
of speculation. So I just don't get it. So you
mentioned speculation and COVID, and I mean this was something
that played into a lot of the cryptocurrency boom, this
idea that you know, people are stuck at home their board,
(39:33):
maybe they got some extra money thanks to the US government,
and they're using it to trade. When you look at
consumers now, and I know at various points in time
you've had positions in subprime auto lending and some consumer
facing things like that, But how would you characterize the
US consumer because this is also something that comes up
as people talk about a potential recession in So let's
(39:57):
just say that over the last several years, credit quality
on the consumer side in the United States, the delinquencies
and losses got so low they were they've been lower
than any time and basically in history. So do I
think there's going to be a normalization of delinquencies and losses.
(40:21):
I mean, I think that Jamie Diamond said that on
the most recent conference goal of JP Morgan, But you
really haven't seen it yet. So some are still in
pretty good shape, you know, as long as everybody's got
a job. People will pay off their debts, So it's
really a question of unemployment. If unemployment goes up, you'll
see an increase in delinquencies and losses. But it's not
(40:43):
going to be a calamity. It's just going to be
what i'd call a normalization. So what are you sort
of looking for next? I mean, you you mentioned that
at the beginning of the conversation, like there's still some ambiguity,
is like, oh, it's the FED you know later and
that you're gonna start cutting. Well, this revive the growth stocks.
What are the other signs that you would look for,
(41:03):
either like yes, the paradigm shift is here and happening,
and or this is the this is the sector that
really is going to define the next decade, and do
these things like is it reasonable to say they kind
of go by decades, Like if a new paradigm emerges,
that is there like a ten years as well. There's
no reason to say they go by decades. It just
(41:23):
happens to be historically true that they do. Um why
that's so, I don't know, but it just happens to
be the case, you know, And unfortunately, over the last
couple of years. The only thing that's mattered in the
markets is one variable, what's Powell going to do and
how much is he gonna do. There's been very little
(41:46):
what I call dispersion within sectors. So you know, one group,
you know, let's call it tech stocks goes up, they
all go up, and this is because of ETFs. Oil
stocks go up, they all go up. There's no, there's no,
there's not much of dispersion within groups, and that's because
everybody's so focused on rates. I think the key moment
(42:07):
will be, you know, the obviously the FED at some
point will stop. When that is, I don't know. The
The operative question at that point is will the Fed
keep rates there or will they cut? The market is
completely convinced that they will cut, despite the fact that
Powell says that every press conference that we're going to
(42:30):
leave it there. So either you take him at his
word or you don't, and we won't know until that happens.
You mentioned E t F changing the nature of how
stocks trade and the sectoral internal sectoral correlations. Is that
here for good? Oh? Definitely. I mean, I'll give you
an example. There are lots of different E t F
s or algorithms. I'll give you two stocks, and I'm
(42:52):
not being critical of them, but I'm just gonna give
an example of it. So you have a firm which
we discuss, which is buy now, pay later, which is
call it a quasi financial payment stock. And then there's
another stock which I'm very familiar with called Trupanion, which
is a company that does animal health insurance insurance. I
(43:13):
think I might have I think maybe at one point
I had had it too. I had it with them
for a little while. I have I have two dogs,
so for a while I used to have four, and
so we used Trupanion for a while. Now, when you
think about it, what does a firm have to do
with Trupanion. Nothing. I mean one's an animal health insurance
and ones in buy now, pay later. So the two
(43:34):
stocks literally have no overlap in their businesses. They have
nothing to do with one another. They're in different sectors, etcetera.
The only thing they have in common is that they
were high revenue growth, negative earnings companies. And I think
if you would watch the markets on a daily basis,
the correlation between the two is very high because it's
got to be in some kind of et F an algorithm,
(43:56):
which all right, it's but like I said, they have
nothing to do with one another, but they trade together
because there somebody's got some algorithm or et F where
they're both in there E t f s and benchmarks
turned the market into a giant blob. Steve, final question
for you, what one piece of advice would you give
(44:17):
investors and perhaps financial journalists as they go through this
paradigm shift. That's a tough question. I actually don't know
the answer to that. I guess skepticism. You know, you
should always be skeptical about what management say. You should
do your own whole work. That's all I would say.
(44:40):
I don't have what I call it leaving question that
everybody should ask. All right, Steve Eisman, wonderful having you
on a blots Thank you so much for coming on.
Thank you for having me. Thanks Steve. That's great, So Joe,
(45:07):
I enjoyed that conversation so much. It was sort of
wonderful to relive some of the drama of financial crisis.
But I did think the point about this idea that
I think in two everyone thought the FED raising interest
rates was such a big break in the market, and
so there's a sense of whiplash as we kind of
enter three, where we start to see some of the
(45:29):
things that had the most excesses of recover. It's confusing
to everyone. But Steve's point about how you know, this
isn't a sort of one direction process, and you can
get these stops and starts in a paradigm shift. I
think that was interesting. Yeah, no, it really is, like
people give up the dream. It takes a long time,
(45:50):
you know, even like myself and I have never been
like some like Czech cheerleader. I don't think anyone accused
me of even in myself when I think about markets, like, wait,
can like can you make money in other industries? Could
there be a period in time in which these high,
fast growing Silicon Valley companies aren't the darlings of markets,
like even you know, like I never like wanted the
(46:13):
cooler in the first place, but I still like it's
hard to like, you know, turn my head in a
different direction. Well, and also there's so much additional artifice
like built on top of the tech industry at this
point in time, Like there's so much media and things,
like people talk about it so much. I just can't
imagine such you know another industry, like I don't know,
(46:34):
some boring conglomerate that like pulls things out of the
ground something like that, having the same excitement attached to it.
I know, like are people like and even if like
we do have another like let's say we have like
a decade of oil and commodity booms, like we're gonna
have like people on Twitter like doing big threads about
just like to work at you know, Pioneer, it's like
to work I just like don't see it. It's hard
(46:54):
for getting excited about total market size right just steep
Town anyway, total markets as of every car owner in
the entire world. Yeah, so much goes. I've also just
I thought, you know, the part about how much safe
for the financial systems and coming from what I would
say is a very credible source on that top. Yeah,
it is something that we have been hearing repeatedly on
(47:15):
the podcast, and every time I hear it, I do
have that knee jerk two thousand eight PTSD reaction thinking,
oh gosh, we're going to jinx it, but hopefully we
should get Dan Tarulo. Yeah, yeah, I had the same thought.
Let's do it all right? Should we leave it there?
Let's leave it there. This has been another episode of
the All Thoughts podcast. I'm Tracy Alloway. You can follow
me on Twitter at Tracy Alloway and I'm Joe Wisnal.
(47:37):
You can follow me on Twitter at the Stalwork, follow
our producers Carmen Rodriguez at Carmen Armand and Dash Bennett
at dash Bot, and check out all of our podcasts
at Bloomberg onto the handle at podcasts, and for more
odd Lots content, go to bloomberg dot com slash odd Lots,
where we post transcripts. Tracy and I write a blog,
and we have a weekly newsletter that comes out every Friday.
(47:59):
Go there and sign thanks for listening.
Hello, and welcome to another episode of the All Thoughts Podcast.
I'm Tracy Allowin and I'm Joe. Joe. It feels like
an interesting moment in markets. Yes, I mean there's this
sort of short term obvious stuff that's interesting, like oh,
what's going to happen with the soft landing or what's
gonna happen with the Fed, etcetera. But it also feels
(00:31):
like a pretty big turning point in markets overall. Absolutely well.
To me, it feels like kind of a massive flip
flop from Doom and Gloom two, where it kind of
felt like everyone was talking about the world was actually
ending and suddenly, you know, fast forward to just the
beginning of three, and everyone's talking about a soft landing,
maybe the recession is averted. Markets are up quite remarkably,
(00:55):
including things that got absolutely crushed last year. So some
of the big stocks Bitcoin, I mean, some of the
Chinese companies like real estate and consumer tech companies, all
of those are surging, right, So like there's this hope
right that we let's just go back to or let's
just go back to one, like let's just hang on.
(01:16):
And it's sort of this thing because you know, when
I think of when I think of it was sort
of like the ultimate speculative froth low interest rate environment.
And as as everyone's tired of hearing me say, like
on this podcast, like you know, I, you know, I
first got interested in markets at the end of there
(01:36):
it comes, folks. But I remember like those periods where
it's like, you know, you have like you look at
the NAS deck and two thousand and one or two
thousand and you have like these fifty rallies. It's like
we're back. I don't know, we're back. It's over. And
that process of like I guess a bubble deflating is
like a long process. People are slow to give it up. Well,
that's exactly it, and it sort of happens in fits
(01:58):
and starts. And I'm glad you meant shined the keywords there,
which are bubble and you know, speculation, speculative interest, because
today we are going to be talking to someone who
is kind of an expert in exactly that and particularly
one period of speculative financial history. We are going to
be speaking with Steve Eisman. He has a portfolio manager
(02:18):
at New Burger Berman, and he famously bet against subprime
mortgages before the two thousand eight financial crisis. Of course,
you might recognize him from the movie The Big Short.
He was played by Steve Carrell. So really the perfect
guest to talk about markets right now. Perfect, let's do it,
all right, Steve, thank you so much for joining us,
Thanks for having me. So where should we start. Maybe
(02:41):
give us just your top line opinions on where markets
are right now. Um, there's gonna be a long intro. Okay,
that's fine. People are gonna look. So I remember back
in college, one of the most influential books I read
was a book by Thomas cune Cole, The Structure of
Scientific Revolutions. He invented the modern meaning of the word paradigm,
(03:05):
and the point of the book was that science paradigms
change over time. Sometimes those paradigms changed violently, and sometimes
those paradigms change over time because people don't give up
their paradigms easily. And I think we're going through a
period possibly like that again. So you know, markets have
(03:27):
long periods of paradigms where there are certain groups that
are leaders. So in the nineties, for example, it was
largely i'd call it large conglomerates like ge was what
people made money in and wanted to invest in. And
it lasted about eight years until there was a small
(03:47):
period of the dot com bubble, and obviously that ended
and there was a recession, and after that, really through
two thousand and seven, the new paradigm and just to
take a step back, when you know what market paradigm shift,
it's unusual that the old leaders become the new leaders.
There's a shift, and there's there's a new leadership group.
(04:08):
And you know, one of the most important leadership groups,
i'd call it, from two thousand and two through the
end of two thousand and seven were financials, you know,
largely invests in banks, very large banks, where the opinion
of the market was the people who ran these firms
were basically geniuses until they weren't. And you know, we
(04:29):
had a violent period in two thousand and eight and
two thousand and nine where those stocks got crushed. Almost
all of them would have gone bankrupt unless the government
bailed them out, which it did. But you know, financial
stocks that did well in the two thousand's did literally
nothing until probably two thousand and twenty, So call it
(04:52):
a dozen years where the old leadership group evaporated and
it was replaced by new leadership group, and that leadership
group was tech and growth stocks. And I think the
reason for that is that the FED cut rates essentially
to zero and kept them there and so you were
essentially paid to take risk. And as we all know,
(05:13):
there's a discounting mechanism of stocks where you know, you
plot out the earnings and the lower the discount rate,
the more the stock is worth. So the groups that
the group that did best were growth tech stocks, and
within growth tech stocks, the group that did the best
were the high growth no earning stocks, and that left
that basically lasted until last year. And if you look,
(05:36):
you know it was a bad market last year. But
the stocks that did the worst were the growth tech stocks.
And within the growth test tech stocks, the stocks that
did the worst were the high growth no earning stocks,
down generally anywhere from seventy to you know, it's a
crushing percentage, but like I said, you know, people don't
(05:56):
give up paradigms easily. And so so far this year,
the stocks have that have done best were the same
socks that did the worst. And you know, if you
go back to two thousand and nine through early two
thousand and ten, financial stocks had their last hurrah, you know,
Goldman Morgan Stanley had said it did very very well
(06:18):
until you know, Dodd Frank was passed and they had
to deliver, so they had kind of had a last hurror.
And maybe this is the last hurrah right now for
growth stocks. Possibly, And I think it'll all depend pretty
much on the FED. You know, Powell has said that
he's going to keep raising rates and the important sentences
(06:38):
and he'll leave them there. If he leaves them there,
I think we'll have a paradigm shift. If he cuts
it again, we'll go back to what we were, which
is growth stocks. I mean, I think he's going to
leave him there and then we'll have a paradigm shift.
But it's unknowable at this point, you know. Like I said,
paradigm shift can be very violent. They take time. I
think we're in the middle of that right now. And
(07:00):
like I said, it's unusual when you shift to new
paradigm that the old leaders become the new leaders. What
the new leaders will be assuming this happens at this point,
I don't really know, you know, Joe, I'm looking at
the Bubble portfolio, which was created by another all thoughts
guest Paul McNamara and basically has a lot of the
stocks that Steve was just talking about up so far
(07:23):
this year. Tracy was created by Paul and me. Oh,
I'm sorry, I co I co created. I'm so sorry.
Port By the way, some of those stocks are up.
It's pretty it's astonishing now they're up fifty from very
low levels. You know. Take I'm not picking on them.
Take a stock like a firm which is a buy now,
(07:44):
pay later company, really a financial company. I think it's
up sixty sent this year, but it's up sixty percent
this year after being down basically, so I think it
closed last year around eight and it's it's fifty, but
it used to be I don't remember a hundred, two hundred,
whatever it was. Yeah. Another one of these ones that
(08:05):
I've been watching is an open Door, which got below
a dollar at the end of December. Now so like
more than a double, but that was like a twelve dollar.
That was a spack, I mean, so it's incredible beat down.
And then this sort of about what is that process?
You know, you talk about this sort of like the
giving up the dreams and the process by which people
(08:26):
aren't sure it's it over? Is it not over? We
don't want to change the paradigm, just in the sort
of like how do you talk a little bit more
about like how that happens? What that how that process works? Well,
it takes time, you know. I would recommend everybody read
this Thomas qun book. It was published the year I
was born nineteen sixty two, which is I guess revelatory
for me. But but what he describes is, like I said,
(08:51):
people don't give up their paradigms easily. When when Einstein
created his theory of relativity, for example, this is in
the book, is out like everybody said, Oh we've been
waiting for Einstein. Thank god, now we can get rid
of Newton. You know, people, it took several years for
people to realize that that was a better theory. I
think something like that happens in markets. You know. Paradigms
(09:15):
in essence are so deeply ingrained in people's brains they
can't even imagine at times that there could be anything else.
And so, like I said, since paradigms, people don't give
up their paradigms easily. The only thing that gets people
to give them up is time. Now, the financial stocks
(09:36):
that was quick because they utterly collapsed. But that's unusual.
It's not like it's not like in the nineties the
conglomerates collapse. They didn't collapse. Their earnings growth slowed, and
you know, people expected the earnings growth to re accelerate
and it didn't. So, you know, take Ge. You know,
(09:56):
Ge was a star for almost all the nine d
s and then when Emil took over just before nine eleven,
it's deteriorated. You know, one of probably one of the
best trades in the world would have been owning Amazon
and shorting g Right. You know, it's funny, Tracy, I
actually went I mentioned open Door. I got it kind
(10:17):
of wrong. I said it was at twelve and it
was a thirty five dollar stock that went to a dollar.
So I was sort of understating the scale of the collapse.
But more importantly, let's talk about open Doors. Let's get
right into it. So open Door had a business model
where they would buy homes, fix them up, and try
(10:38):
to sell them quickly. Now, when you think about it,
that business model only works if housing prices are going up.
If housing prices are going down, it's a disaster. Um.
So I never thought it was a real business model.
It was a timing model. And I think the reason
why the stock got crushed last year is because, I mean,
(10:59):
housing hasn't collapsed in the United States, but it's kind
of locked and housing prices have gone down, so it's
hard to sell and be you're selling for less, and
that's why Open Doors down so much. But you know
what it came out. It was another one of these
speculative going to conquer the world stocks until it wasn't.
(11:35):
I definitely want to talk more to you about housing
and real estate in a second, but just on the
paradigm shift. You know, when I think about the paradigm
of the past couple of years, you mentioned low interest
rates and that helping to boost valuations, but I also
think about momentum and people just identifying the thing that
they think other people are going to buy and then
(11:55):
pouring into that and so having a lot of valuations
driven by flows. Can you talk about that behavior in
the market. I call this what I call it this
the Amazon disease. I'm not saying Amazon is a bad company.
It's a great company. What I mean by the Amazon diseases,
you know, and when Amazon came public, there was a
(12:18):
lot of skepticism that this work. And Amazon has basically
conquered the world, and so people are always looking for
the next Amazon. And you know that they're looking for
the next Amazon when they just when they write when
when the cell side writes a research report and the
first sentences the TAM is huge, which means the total
(12:40):
available market is huge. Well, you know, take open door again.
Housing is huge. I mean, there's no question that housing
is huge. But that doesn't mean people's business models are
going to conquer housing. But people are constantly you know, again,
when rates or zero, you're paid to speculate. So you
(13:00):
look at open door and you say, well, the housing
market in the United States is I don't know, a
trillion to whatever, it is a trillion to trillion. If
open Door only gets one cent of that market, the
stock is huge. And as long as revenue growth is strong,
people are willing to make that bet. When revenue growth
(13:22):
starts to slow, they they get they don't think about
the TAM anymore. They start to think about the business model.
So you know, in two thousand and ten through tooth
beginning of two thousand and twenty two, if you were
a company that had no earnings that strong revenue growth,
people dream the dream. When the revenue grow slows, people
(13:45):
stopped dreaming the dream. Or combination of that with higher
rates and the discounting mechanism takes down the stock. You know,
even companies that did well last you went down because
of the discounting mechanism. So let's say we are at
this paradigm shift and we don't know what it's gonna be.
We don't know what it's gonna look like, but something
(14:07):
that's not speculative tech will be the new leadership, presumably
for a while. As an investor, like, do you feel
like you can wait and sort of see what it
is and like let the market kind of decide, or
do you feel like an impulse to try to anticipate
today what that thing. I think you anticipate a little bit,
you know. So, for example, I think one of the
(14:29):
themes for the next several year is what I would
call the ressoring of the industrial world back into the
United States. So, you know, for the last call it
thirty years, companies have essentially sent their supply lines out
to the inside the United States because labor in the
(14:49):
United States is expensive and labor in China and Vietnam
is cheap, and that worked for a very long time,
and it was very deflationary. And COVID proved one thing. Yes,
that supply chain is less expensive, but it's also very brittle.
And because of what happened during COVID, people are companies
(15:13):
are bringing back the supply chain, at least partially back
to the United States. So, you know, stocks that haven't
done anything in twenty years, let's say, might start to
do well, like b HP, iron ore, etcetera. That's one
theme that I think will last a long time. Greenisfication
(15:34):
I think will last a long time. Although some of
those stocks have no earnings and high revenue growth, I
never quite know what to make of them. But there
are other ways to play the same theme. You know,
their companies I won't mention any names, but their companies
that are that are well, let's call them normal, that
(15:54):
are helping rebuild the infrastructure of the United States and
the electrification of the United States, etcetera. So those are
things you could start to look at. So that's actually
something that we've spoken quite a lot about on all
lots of this idea of a sort of shift from
I guess ephemerate tech software to the reality of actual things.
(16:16):
This might be a slightly weird question, but do you
think investors are well positioned or well informed to grasp
that shift, because I imagine there must be a fundamental
difference between looking at a tech company versus say, I
don't know, in an oil major or something like that. Oh,
I don't think people are prepared yet. You know, they've
owned tech stocks for so long. You know, they look
(16:39):
at revenue growth, they look at e v D. But uh,
you know, one of the things that I find astonishing,
for example, about tech stocks is they don't include stock
based compensation and earnings, which I just find a little weird.
And because I would always ask, do you deduct stock
based competence? Stock based come from your taxes? And the
(17:02):
ends to that is always yeah, So in that sense
it's real, but when the report earnings, they pretend it's
not real. But the market doesn't seem to care. But
I think it's going to take time, you know, like I,
like I always talked about before some of these very
speculative stocks are up this year, it's going to take
time for people to start to do I think research
(17:25):
on other stuff. I know you weren't investing yet at
this point. But you know, as a student of market history,
was there the same process like with the like earlier
tech bubbles, like in the sixties, with the aerospace stocks
and some of those other waves. I mean, I was
in great school, and that's what I'm saying. No, I
figured out. But I although the two of you, I
don't think we're alive back then. Um. You know, I
(17:48):
think if you look at economic history, probably it's true.
I haven't really looked at that much. But you know,
in the in the late seventies, the group that people
wanted to own work whil stocks. Oil stocks haven't done
well for god knows how many years until basically the
last two Now let's talk about old stocks for a second.
(18:09):
You know, pipeline stocks, oil stocks. You know, why did
they do so poorly? This is not a paradigm shift.
This is a shareholder's revolt issue. So you know, if
you look back, call it two thousand and ten through
maybe two thousand eighteen or so. And this is where
I would say incentives trump ethics every time. So the
(18:32):
people who ran these companies where it was the midstream
pipelines or the drillers the c e O s of
those companies were all compensated essentially on volume, so it
didn't matter whether the oil prices with thirty or they're
all prices were eighty. They kept growing their production and
(18:53):
in most cases they basically never made money whether oil
prices with thirty or prices were eighty. And at some
poll point, probably around two thousand and sixteen, when the
group got crushed, I think that the shareholders literally revolted
and they went to these managements and said enough and
you have to change your compensation to R O E, etcetera.
(19:14):
And the stocks have done pretty well since that, especially
in the last two years, because the way they operate
now is they basically planned their business models for oil
prices as something like fifty to sixty, and if oil
prices are above they return the money to shareholders, which
is one of the reasons why despite the fact that
(19:35):
all prices were so high last year, those same companies
did not increase their production that much. Now, some people
accused the Biden administration of this. I don't think it
has anything to do with the Biden administration. Has to
do with the change and incentive structure for these companies.
Incentives trumping ethics is such a good line and I'm
(19:55):
definitely going to steal it from you at some point, Steve,
you can play giarize. You don't even a the quotemak.
Thank you. I think I appreciate that, um I have
a full license on that line. You know, given your background,
I think we would be remissed to not talk a
little bit about financial risk and financial stability. And this
is something that has come up over the past year
with the FED raising interest rates so rapidly, and yet
(20:18):
we haven't actually seen a significant break Is the system fixed?
Is it just not going to come that big breakage
that you know some people have been anticipating for a while. Well,
I can't say that they won't be breakage any anywhere
that I mean, there always could be breakage. What I
would say definitively is that there will not be breakage
(20:42):
in the US financial system, especially in the banks. We
can owe that to one person, which is Daniel Tarullo,
who was the first Vice Chairman in charge of Financial
Supervision at the FED, which was a position that was
created only from Dodd Frank and he was given the job.
(21:03):
Although it's funny he was never actually officially appointed to
the job, because you know, it makes it. He'd have
to testify in front of the Senate. It would have
been difficult, but he he was essentially given the job anyway,
and he really took the banks. He was very harsh
what he did to them. The banks objected to literally
(21:24):
kicking and screaming, but today they probably all thank him.
There are two things that he did. He reduced leverage
in the banks enormously, and even within that leverage, he
made them cut off the tails of risk. So, just
to give you an example, City Group before the crisis,
(21:46):
if you included all the off balance sheets stuff that
eventually came back on balance sheet, it was probably levered
anywhere from thirty five to forty to one, and by
the time he was on it was lever tent to one. Now,
for listeners, that may not mean that much. You know,
(22:08):
forty to ten, you know, those are just numbers. But
the way I would describe it is, when you're levered
forty to one, to destroy the bank, you need a pebble,
but when the bank is levered ten to one, you
need a meteor. So now we could have worst credit
(22:28):
in the United States, Although that really hasn't happened yet,
So under those circumstances, the banks would earn less. But
I would say other than a couple of banks, not
one bank in the United States will lose money. M hm.
I seem to remember, weren't you one of the few
people that read all of Dodd Frank from like front
(22:50):
to back. I think it was two thousand pages? Or well,
that's not true, that's a myth. Okay, So you're talking
about finding controls stability, but you know, we also touched
on real estate earlier, and again, you know, you you
sort of characterized the housing market it's kind of in
a freeze. Maybe it's already stabilized a little bit, but
(23:11):
with rage having shot up so much, I mean, like,
how are you thinking about like housing and where it's
going to go? And can like, can it stabilize with
such a repricing of mortgages in a short period of time? Um?
I mean sure it can reprice, it takes time. I
did a small calculation when mortgage rates got to seven,
which was if you calculated the monthly payment of someone
(23:35):
who bought a home with a three percent mortgage versus
someone who wants to buy the same home at the
same price with the same mortgage at seven percent. For
that person to have the same monthly payment as the
person with a three percent mortgage, the price of the
house has to go down from now. As long as
(23:58):
people are employed, they're not going to sell their home down.
They'll just live in their home. So housing prices have
come down some, but it's still the case I think
that the housing market is locked. Let's say you want
to you have a small home. You got a couple
of kids now, so you want to sell your house
(24:19):
and you want to buy a larger house. You can't.
You're stuck, so you're buy bunk beds. But well, it's
nothing wrong with that. But not only is housing locked.
You know, building suppliers have you know, less ability to
sell their products because housing is not turning over. So
(24:41):
that would be a short area. But I'm not going
to give you any names. So this is actually something
that I've been thinking about a little bit, which is
house prices are sort of being supported by a liquidity
at the moment right And I don't think they's supported
by a liquidity. I think they're being supported by employment.
You know, Like I said, if if you're you have
(25:01):
a three percent mortgage, so your monthly payment is very
very low. You have a job, you don't have to
sell your house. You're just not going to sell it
down a lot, so you just sit there and hope
that eventually people will get used to a seven percent
mortgage and you can sell your home. But that can
take a long time. That's fair. What I was going
to ask about is recent events that we've seen with
the Real Estate Investment Trust. And we're recording this on
(25:24):
February first, Blackstone just announced that it hit a monthly
redemption limit. Is there going to be what was the number?
Did they say, okay, that was in line with people's expectations.
I think it's not a great number. And they have gates,
so I forget what the number is, but you can't
(25:44):
withdraw five billion in a month. It's probably I don't know,
five millions something like that maybe, so you know, they
have gates. But this is kind of where I was
going with a liquidity point, right. I mean, you know,
let'st's talk about the black drown you know, private read.
So I'm not being critical to Blackstone, but when when
(26:05):
you think about the structure of that read, it has
what i'd call an asset liability mismatch, meaning you're investing
in real estate. Those investments could be good, but they're
a liquid so it's not like you can sell a
building overnight, but your your liabilities, meaning your investors, can
(26:26):
withdraw money every single month, so if the withdrawals get
too bad, you can have to sell some of your
real estate. Now, Blackstone has a very good reputation, so
it might be fine. But I think what happened last
year with that it's called the be read, is that
about of the Breads investors were from Asia, and those
(26:48):
Asian investors got from some investment banks enormous leverage to invest,
and given what the markets did last year, they got
margin calls and they to, you know, withdraw money from
Blackstone to pay off their margin calls. Now, how much
more that's going to take place in the next several months,
I have no idea. So we talked about how investors
(27:26):
leave the old paradigm kicking and screaming, But I'm thinking
also about scars from the past. And I feel like
people listening to here like there's some liquid fund and
there's some margin call, and there's this real people ganking
their money out and they're like, they reached for the
two thou seven playbook in their minds and the two eight.
To what degree do you think memories of that crisis
(27:49):
are still informing how investors think about and try to
assess the market today. Oh, I think two thousand and
two thousand eight for some investors is like PTSD. Look,
financials are implicated. There aren't a lot of people on
planet Earth who really understand how much the financial structure
of the United States and Europe has really changed. So
(28:09):
they see they see the markets go down, and they
say to themselves, oh, my god, something bad is going
to happen. Now, something bad could happen. You know, we
could have a recession. But my feeling is will have
an old fashioned run of the mill recession. We're not
going to have some enormous, you know, meltdown crisis where
(28:29):
the system is completely at risk, which is what happened
in a way before you forget I mean you use
the pebble versus meteor analogy. Can you just explain, like,
what is it about the nature of US banks? Now
there you say they cannot lose money, Well, you're level
at forty two one. You know what happened in the
financial crisis. One of the things that's very important, and
(28:53):
getting back to my line which I've donated to you,
incentives trump ethics every time, is there there's a concept
called risk weighted assets where the system, you know, the
regulatory system, tried to merge the concept of leverage with
risk and so every asset on the balance sheet got
(29:13):
a risk weight, and so when regulators and companies calculated leverage,
it wasn't assets divided by equity, it was risk weighted
assets divided by equity. So if you look at Europe,
for example, where you know the banks are much more uniform,
from two thousand and seven, I'm sorry, from through two
thousand and seven, absolute leverage in the banks in Europe
(29:36):
went up three times, but on a risk weighted asset basis,
they were flat. So a lot of the executives who
ran these companies, when they looked at their balance sheet,
they said, oh, our leverage is the same when an
actuality was much higher and they had a lot of
risk on their balance sheets. They had a lot of
subprime assets of various kinds, which all blew up in
(30:00):
their face. And so because they were levered so much,
they essentially died. The only reason why they survived because
they were bailed out. So today, not only is the
absolute leverage lower, like I said, City has come from
thirty five to forty times too went to ten. Maybe
today it's twelve, but the type of risk that they take,
(30:24):
generally speaking, is far far lower because the regulators who
essentially live in these banks are not allowing them to
take enormous types of risk in their loan books. So look,
the system, like I said, is probably safe for the
first time in my lifetime in that sense, But I
(30:44):
don't think a lot of people really understand that that's
the case. You know, you mentioned investors getting PTSD from
two thousand and eight, and it's sort of informing and
affecting their subsequent behavior. And I don't think you got
PTSD because you made a lot of money out of it,
but it was a defining moment of your career. How
did you yourself move past that particular era? And what
(31:09):
I mean by that is there are people out there
who made a lot of money in two thousand and
eight who subsequently every year had been issuing warnings about
how the entire market is going to fall apart. The
financial system is going to collapse. How did you move
past that? Great question? A lot of therapy? Uh no, no,
I I where I got past it was well, I
(31:32):
actually got friendly with Daniel Torulo, so I watched what
he did very very closely, and you know, I realized
that what he'd accomplished was actually astonishing, and so the system,
you know, was fine. What what I didn't anticipate until
years later was that because the FED cut rates, you
(31:53):
were paid to take so much risk, you could do
what you wanted to do was buy companies with no earnings.
That was much harder to make that shift. But I
didn't think that the financial system was going to go
down again. Yeah, it really is extraordinary, Like how I
mean you see it's still you know, like what was
it credit sweets a few months ago? Like people are
just not able to get past this sort of like yeah,
(32:15):
great financial I wasn't going to name any names job,
nobody was just like people were like it was in
the headlines and stuff, and you know, people just like
reach for those old analogies. So just looking back at
your career, you know, you're very long and illustrious career,
But what was your flattering Yeah, what was your most
shocking moment, Like what surprised you the most, Whether it
(32:38):
was a company that you know failed or maybe succeeded,
or the particular behavior by someone or an entity. Well,
what surprised me the most was what happened in O eight.
I thought that surely the regulators knew what I knew.
(32:58):
How could they not because they had much more information
than I did. And it became very very clear as
OH eight went on that they didn't really understand what
was going on until it was too late. And I
remember Bernanke made a speech he said something like subprime
(33:21):
mortgage risk is confined. And I turned to one of
my colleagues and I said, yeah, it's confined. Alright, it's
confined the planet Earth. That's funny. By the way, pay attention.
I'm laughing internally. So you know, when you read um,
(33:42):
I figured the book by but it was a book
that was a very early book about the financial crisis.
And there was a scene where it was the weekend
when Lehman went down, and there was a scene described
in the book where as Lehman is going down, they
(34:03):
know what's going down. Someone walks into the room. I mean,
I'm just paraphrasing and basically says a I G is
also in trouble, and I'm thinking this is a shock
to you a lot, Like don't you read the research?
I mean, I couldn't believe it. But that was the
most shocking thing in my career. I could not believe
(34:23):
that the regulators and the government really had no idea
what was going on. Can you talk a little bit
more about Like, Okay, to make any real money in
the market, there must be some sustained periods where you
have a different view than the overall mark. I don't
think that's necessarily true, you know, oh six oh seven,
(34:46):
oh eight, I had a very different view. Yeah. Is
that hard? Oh my god, it's ridiculously hard. The whole
world is telling you that you're an idiot, and then
sometimes you think you're an idiot. So that's hard. Well,
because like I mean, I've you know, I've been thinking
about that to like a lot of people, for example,
and I don't I don't want to like actually dive
(35:06):
into this specific they went a lot of people for
example of like had to deal with this in the
last year related to cryptocurrencies, where like everyone's calling them
an idiot for like not really getting it and then
maybe they're right. But that process of like being called
an idiot, maybe underperforming or missing some market move for
years and being told like you fool, don't you see
what's happening, it seems like psychologically you mentioned therapy earlier, Steve,
(35:29):
this is where if I had a therapist, I would
talk about abuse from bitcoiners. Well, let's let's talk about
big quarter can mean getting back to do you have
to be different? You know, from two thousand and ten
through two thousand and twenty, if you objected to high
growth stocks with no earnings and you will short them,
(35:51):
you'd basically be dead. So that can last a long
time even though you have a different opinion. You do
not have to have pretty good time to deal with that.
But let's talk about bitcoin. That's a great fun topic.
So I remember during COVID, you know, I was out
on Long Island in the north for basically living there,
(36:14):
and I would come back to the city every Tuesday
to visit my mother, and so I would drive to
the city. There would be no traffic and it would
take me about two hours. So I listened to podcasts.
What else are you gonna do? I even listened to
this podcast every now and and but one of the
group of podcasts that I listened to were the so
called experts on bitcoin. And there are always two questions
(36:39):
that I had. Number one, why is bitcoin a currency?
And number two, Okay, it's a currency, but how should
it trade now? On every single podcast, they completely skipped
over the why is it a currency issue? That was
like that was just a given, and that's not given
(37:01):
to me. We can get back to that, but it
was a given. The second part of the story about
how should bitcoin act, they all had the same opinion,
which was fear currency, which is government issued currency, has
been terribly debased because of all the deficits that all
these countries have issued. But it's very hard to short
(37:22):
fear currency because they all trade relative to one another.
So if you short the dollar, your problem is that
in in a basketball team where everybody's five four, the
dollar is five eleven. So it's hard to short the
dollar because it's it's taller than the other currencies. Even
(37:43):
though quote unquote has been debased. So therefore you should
buy bitcoin as a hedge against the debasement of all currencies. Okay,
so let's accept that theory for a second. If that's
the case, then bitco point should go up when people
are nervous and rates are going up, and Bitcoin should
(38:05):
go down when rates are going down. Every everybody feels good.
And the problem was it actually did the opposite. It
would go up with everything else speculative, and it would
go down with everything else speculative. So what was the point.
So you know, Bitcoin is up a lot this year
because it's up a lot with everything else speculative. Now,
(38:29):
you can't have a currency that moves every six months.
That's not a currency, that's a speculation. And the thing
I don't understand about bitcoin is what problem is it solving?
You know, is there a problem with currency? I mean,
the last time you went to the store and you
(38:50):
you pulled out a twenty dollar bill, you paid with
your credit card, did the store owners say, oh, no,
I don't take dollars. I mean, it's not even an issue.
And by the way, the currency markets are the most
liquid markets in the world. You know, I like to say,
how long does it take to buy dollar? Euro? Done?
A billion dollars done? That's how quickly it is. So
(39:13):
I don't understand what bitcoin solves. And I don't understand
the purpose of owning it other than it's another form
of speculation. So I just don't get it. So you
mentioned speculation and COVID, and I mean this was something
that played into a lot of the cryptocurrency boom, this
idea that you know, people are stuck at home their board,
(39:33):
maybe they got some extra money thanks to the US government,
and they're using it to trade. When you look at
consumers now, and I know at various points in time
you've had positions in subprime auto lending and some consumer
facing things like that, But how would you characterize the
US consumer because this is also something that comes up
as people talk about a potential recession in So let's
(39:57):
just say that over the last several years, credit quality
on the consumer side in the United States, the delinquencies
and losses got so low they were they've been lower
than any time and basically in history. So do I
think there's going to be a normalization of delinquencies and losses.
(40:21):
I mean, I think that Jamie Diamond said that on
the most recent conference goal of JP Morgan, But you
really haven't seen it yet. So some are still in
pretty good shape, you know, as long as everybody's got
a job. People will pay off their debts, So it's
really a question of unemployment. If unemployment goes up, you'll
see an increase in delinquencies and losses. But it's not
(40:43):
going to be a calamity. It's just going to be
what i'd call a normalization. So what are you sort
of looking for next? I mean, you you mentioned that
at the beginning of the conversation, like there's still some ambiguity,
is like, oh, it's the FED you know later and
that you're gonna start cutting. Well, this revive the growth stocks.
What are the other signs that you would look for,
(41:03):
either like yes, the paradigm shift is here and happening,
and or this is the this is the sector that
really is going to define the next decade, and do
these things like is it reasonable to say they kind
of go by decades, Like if a new paradigm emerges,
that is there like a ten years as well. There's
no reason to say they go by decades. It just
(41:23):
happens to be historically true that they do. Um why
that's so, I don't know, but it just happens to
be the case, you know, And unfortunately, over the last
couple of years. The only thing that's mattered in the
markets is one variable, what's Powell going to do and
how much is he gonna do. There's been very little
(41:46):
what I call dispersion within sectors. So you know, one group,
you know, let's call it tech stocks goes up, they
all go up, and this is because of ETFs. Oil
stocks go up, they all go up. There's no, there's no,
there's not much of dispersion within groups, and that's because
everybody's so focused on rates. I think the key moment
(42:07):
will be, you know, the obviously the FED at some
point will stop. When that is, I don't know. The
The operative question at that point is will the Fed
keep rates there or will they cut? The market is
completely convinced that they will cut, despite the fact that
Powell says that every press conference that we're going to
(42:30):
leave it there. So either you take him at his
word or you don't, and we won't know until that happens.
You mentioned E t F changing the nature of how
stocks trade and the sectoral internal sectoral correlations. Is that
here for good? Oh? Definitely. I mean, I'll give you
an example. There are lots of different E t F
s or algorithms. I'll give you two stocks, and I'm
(42:52):
not being critical of them, but I'm just gonna give
an example of it. So you have a firm which
we discuss, which is buy now, pay later, which is
call it a quasi financial payment stock. And then there's
another stock which I'm very familiar with called Trupanion, which
is a company that does animal health insurance insurance. I
(43:13):
think I might have I think maybe at one point
I had had it too. I had it with them
for a little while. I have I have two dogs,
so for a while I used to have four, and
so we used Trupanion for a while. Now, when you
think about it, what does a firm have to do
with Trupanion. Nothing. I mean one's an animal health insurance
and ones in buy now, pay later. So the two
(43:34):
stocks literally have no overlap in their businesses. They have
nothing to do with one another. They're in different sectors, etcetera.
The only thing they have in common is that they
were high revenue growth, negative earnings companies. And I think
if you would watch the markets on a daily basis,
the correlation between the two is very high because it's
got to be in some kind of et F an algorithm,
(43:56):
which all right, it's but like I said, they have
nothing to do with one another, but they trade together
because there somebody's got some algorithm or et F where
they're both in there E t f s and benchmarks
turned the market into a giant blob. Steve, final question
for you, what one piece of advice would you give
(44:17):
investors and perhaps financial journalists as they go through this
paradigm shift. That's a tough question. I actually don't know
the answer to that. I guess skepticism. You know, you
should always be skeptical about what management say. You should
do your own whole work. That's all I would say.
(44:40):
I don't have what I call it leaving question that
everybody should ask. All right, Steve Eisman, wonderful having you
on a blots Thank you so much for coming on.
Thank you for having me. Thanks Steve. That's great, So Joe,
(45:07):
I enjoyed that conversation so much. It was sort of
wonderful to relive some of the drama of financial crisis.
But I did think the point about this idea that
I think in two everyone thought the FED raising interest
rates was such a big break in the market, and
so there's a sense of whiplash as we kind of
enter three, where we start to see some of the
(45:29):
things that had the most excesses of recover. It's confusing
to everyone. But Steve's point about how you know, this
isn't a sort of one direction process, and you can
get these stops and starts in a paradigm shift. I
think that was interesting. Yeah, no, it really is, like
people give up the dream. It takes a long time,
(45:50):
you know, even like myself and I have never been
like some like Czech cheerleader. I don't think anyone accused
me of even in myself when I think about markets, like, wait,
can like can you make money in other industries? Could
there be a period in time in which these high,
fast growing Silicon Valley companies aren't the darlings of markets,
like even you know, like I never like wanted the
(46:13):
cooler in the first place, but I still like it's
hard to like, you know, turn my head in a
different direction. Well, and also there's so much additional artifice
like built on top of the tech industry at this
point in time, Like there's so much media and things,
like people talk about it so much. I just can't
imagine such you know another industry, like I don't know,
(46:34):
some boring conglomerate that like pulls things out of the
ground something like that, having the same excitement attached to it.
I know, like are people like and even if like
we do have another like let's say we have like
a decade of oil and commodity booms, like we're gonna
have like people on Twitter like doing big threads about
just like to work at you know, Pioneer, it's like
to work I just like don't see it. It's hard
(46:54):
for getting excited about total market size right just steep
Town anyway, total markets as of every car owner in
the entire world. Yeah, so much goes. I've also just
I thought, you know, the part about how much safe
for the financial systems and coming from what I would
say is a very credible source on that top. Yeah,
it is something that we have been hearing repeatedly on
(47:15):
the podcast, and every time I hear it, I do
have that knee jerk two thousand eight PTSD reaction thinking,
oh gosh, we're going to jinx it, but hopefully we
should get Dan Tarulo. Yeah, yeah, I had the same thought.
Let's do it all right? Should we leave it there?
Let's leave it there. This has been another episode of
the All Thoughts podcast. I'm Tracy Alloway. You can follow
me on Twitter at Tracy Alloway and I'm Joe Wisnal.
(47:37):
You can follow me on Twitter at the Stalwork, follow
our producers Carmen Rodriguez at Carmen Armand and Dash Bennett
at dash Bot, and check out all of our podcasts
at Bloomberg onto the handle at podcasts, and for more
odd Lots content, go to bloomberg dot com slash odd Lots,
where we post transcripts. Tracy and I write a blog,
and we have a weekly newsletter that comes out every Friday.
(47:59):
Go there and sign thanks for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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