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Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.

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Speaker 1: I'm Tracy Allowin and I'm Joe. Joe. It feels like

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Speaker 1: an interesting moment in markets. Yes, I mean there's this

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Speaker 1: sort of short term obvious stuff that's interesting, like oh,

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Speaker 1: what's going to happen with the soft landing or what's

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Speaker 1: gonna happen with the Fed, etcetera. But it also feels

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Speaker 1: like a pretty big turning point in markets overall. Absolutely well.

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Speaker 1: To me, it feels like kind of a massive flip

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Speaker 1: flop from Doom and Gloom two, where it kind of

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Speaker 1: felt like everyone was talking about the world was actually

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Speaker 1: ending and suddenly, you know, fast forward to just the

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Speaker 1: beginning of three, and everyone's talking about a soft landing,

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Speaker 1: maybe the recession is averted. Markets are up quite remarkably,

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Speaker 1: including things that got absolutely crushed last year. So some

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Speaker 1: of the big stocks Bitcoin, I mean, some of the

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Speaker 1: Chinese companies like real estate and consumer tech companies, all

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Speaker 1: of those are surging, right, So like there's this hope

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Speaker 1: right that we let's just go back to or let's

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Speaker 1: just go back to one, like let's just hang on.

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Speaker 1: And it's sort of this thing because you know, when

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Speaker 1: I think of when I think of it was sort

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Speaker 1: of like the ultimate speculative froth low interest rate environment.

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Speaker 1: And as as everyone's tired of hearing me say, like

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Speaker 1: on this podcast, like you know, I, you know, I

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Speaker 1: first got interested in markets at the end of there

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Speaker 1: it comes, folks. But I remember like those periods where

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Speaker 1: it's like, you know, you have like you look at

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Speaker 1: the NAS deck and two thousand and one or two

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Speaker 1: thousand and you have like these fifty rallies. It's like

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Speaker 1: we're back. I don't know, we're back. It's over. And

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Speaker 1: that process of like I guess a bubble deflating is

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Speaker 1: like a long process. People are slow to give it up. Well,

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Speaker 1: that's exactly it, and it sort of happens in fits

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Speaker 1: and starts. And I'm glad you meant shined the keywords there,

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Speaker 1: which are bubble and you know, speculation, speculative interest, because

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Speaker 1: today we are going to be talking to someone who

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Speaker 1: is kind of an expert in exactly that and particularly

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Speaker 1: one period of speculative financial history. We are going to

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Speaker 1: be speaking with Steve Eisman. He has a portfolio manager

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Speaker 1: at New Burger Berman, and he famously bet against subprime

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Speaker 1: mortgages before the two thousand eight financial crisis. Of course,

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Speaker 1: you might recognize him from the movie The Big Short.

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Speaker 1: He was played by Steve Carrell. So really the perfect

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Speaker 1: guest to talk about markets right now. Perfect, let's do it,

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Speaker 1: all right, Steve, thank you so much for joining us,

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Speaker 1: Thanks for having me. So where should we start. Maybe

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Speaker 1: give us just your top line opinions on where markets

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Speaker 1: are right now. Um, there's gonna be a long intro. Okay,

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Speaker 1: that's fine. People are gonna look. So I remember back

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Speaker 1: in college, one of the most influential books I read

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Speaker 1: was a book by Thomas cune Cole, The Structure of

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Speaker 1: Scientific Revolutions. He invented the modern meaning of the word paradigm,

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Speaker 1: and the point of the book was that science paradigms

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Speaker 1: change over time. Sometimes those paradigms changed violently, and sometimes

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Speaker 1: those paradigms change over time because people don't give up

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Speaker 1: their paradigms easily. And I think we're going through a

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Speaker 1: period possibly like that again. So you know, markets have

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Speaker 1: long periods of paradigms where there are certain groups that

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Speaker 1: are leaders. So in the nineties, for example, it was

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Speaker 1: largely i'd call it large conglomerates like ge was what

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Speaker 1: people made money in and wanted to invest in. And

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Speaker 1: it lasted about eight years until there was a small

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Speaker 1: period of the dot com bubble, and obviously that ended

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Speaker 1: and there was a recession, and after that, really through

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Speaker 1: two thousand and seven, the new paradigm and just to

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Speaker 1: take a step back, when you know what market paradigm shift,

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Speaker 1: it's unusual that the old leaders become the new leaders.

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Speaker 1: There's a shift, and there's there's a new leadership group.

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Speaker 1: And you know, one of the most important leadership groups,

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Speaker 1: i'd call it, from two thousand and two through the

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Speaker 1: end of two thousand and seven were financials, you know,

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Speaker 1: largely invests in banks, very large banks, where the opinion

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Speaker 1: of the market was the people who ran these firms

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Speaker 1: were basically geniuses until they weren't. And you know, we

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Speaker 1: had a violent period in two thousand and eight and

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Speaker 1: two thousand and nine where those stocks got crushed. Almost

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Speaker 1: all of them would have gone bankrupt unless the government

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Speaker 1: bailed them out, which it did. But you know, financial

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Speaker 1: stocks that did well in the two thousand's did literally

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Speaker 1: nothing until probably two thousand and twenty, So call it

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Speaker 1: a dozen years where the old leadership group evaporated and

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Speaker 1: it was replaced by new leadership group, and that leadership

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Speaker 1: group was tech and growth stocks. And I think the

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Speaker 1: reason for that is that the FED cut rates essentially

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Speaker 1: to zero and kept them there and so you were

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Speaker 1: essentially paid to take risk. And as we all know,

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Speaker 1: there's a discounting mechanism of stocks where you know, you

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Speaker 1: plot out the earnings and the lower the discount rate,

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Speaker 1: the more the stock is worth. So the groups that

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Speaker 1: the group that did best were growth tech stocks, and

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Speaker 1: within growth tech stocks, the group that did the best

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Speaker 1: were the high growth no earning stocks, and that left

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Speaker 1: that basically lasted until last year. And if you look,

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Speaker 1: you know it was a bad market last year. But

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Speaker 1: the stocks that did the worst were the growth tech stocks.

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Speaker 1: And within the growth test tech stocks, the stocks that

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Speaker 1: did the worst were the high growth no earning stocks,

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Speaker 1: down generally anywhere from seventy to you know, it's a

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Speaker 1: crushing percentage, but like I said, you know, people don't

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Speaker 1: give up paradigms easily. And so so far this year,

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Speaker 1: the stocks have that have done best were the same

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Speaker 1: socks that did the worst. And you know, if you

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Speaker 1: go back to two thousand and nine through early two

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Speaker 1: thousand and ten, financial stocks had their last hurrah, you know,

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Speaker 1: Goldman Morgan Stanley had said it did very very well

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Speaker 1: until you know, Dodd Frank was passed and they had

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Speaker 1: to deliver, so they had kind of had a last hurror.

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Speaker 1: And maybe this is the last hurrah right now for

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Speaker 1: growth stocks. Possibly, And I think it'll all depend pretty

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Speaker 1: much on the FED. You know, Powell has said that

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Speaker 1: he's going to keep raising rates and the important sentences

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Speaker 1: and he'll leave them there. If he leaves them there,

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Speaker 1: I think we'll have a paradigm shift. If he cuts

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Speaker 1: it again, we'll go back to what we were, which

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Speaker 1: is growth stocks. I mean, I think he's going to

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Speaker 1: leave him there and then we'll have a paradigm shift.

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Speaker 1: But it's unknowable at this point, you know. Like I said,

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Speaker 1: paradigm shift can be very violent. They take time. I

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Speaker 1: think we're in the middle of that right now. And

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Speaker 1: like I said, it's unusual when you shift to new

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Speaker 1: paradigm that the old leaders become the new leaders. What

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Speaker 1: the new leaders will be assuming this happens at this point,

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Speaker 1: I don't really know, you know, Joe, I'm looking at

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Speaker 1: the Bubble portfolio, which was created by another all thoughts

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Speaker 1: guest Paul McNamara and basically has a lot of the

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Speaker 1: stocks that Steve was just talking about up so far

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Speaker 1: this year. Tracy was created by Paul and me. Oh,

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Speaker 1: I'm sorry, I co I co created. I'm so sorry.

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Speaker 1: Port By the way, some of those stocks are up.

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Speaker 1: It's pretty it's astonishing now they're up fifty from very

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Speaker 1: low levels. You know. Take I'm not picking on them.

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Speaker 1: Take a stock like a firm which is a buy now,

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Speaker 1: pay later company, really a financial company. I think it's

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Speaker 1: up sixty sent this year, but it's up sixty percent

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Speaker 1: this year after being down basically, so I think it

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Speaker 1: closed last year around eight and it's it's fifty, but

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Speaker 1: it used to be I don't remember a hundred, two hundred,

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Speaker 1: whatever it was. Yeah. Another one of these ones that

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Speaker 1: I've been watching is an open Door, which got below

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Speaker 1: a dollar at the end of December. Now so like

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Speaker 1: more than a double, but that was like a twelve dollar.

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Speaker 1: That was a spack, I mean, so it's incredible beat down.

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Speaker 1: And then this sort of about what is that process?

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Speaker 1: You know, you talk about this sort of like the

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Speaker 1: giving up the dreams and the process by which people

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Speaker 1: aren't sure it's it over? Is it not over? We

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Speaker 1: don't want to change the paradigm, just in the sort

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Speaker 1: of like how do you talk a little bit more

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Speaker 1: about like how that happens? What that how that process works? Well,

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Speaker 1: it takes time, you know. I would recommend everybody read

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Speaker 1: this Thomas qun book. It was published the year I

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Speaker 1: was born nineteen sixty two, which is I guess revelatory

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Speaker 1: for me. But but what he describes is, like I said,

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Speaker 1: people don't give up their paradigms easily. When when Einstein

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Speaker 1: created his theory of relativity, for example, this is in

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Speaker 1: the book, is out like everybody said, Oh we've been

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Speaker 1: waiting for Einstein. Thank god, now we can get rid

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Speaker 1: of Newton. You know, people, it took several years for

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Speaker 1: people to realize that that was a better theory. I

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Speaker 1: think something like that happens in markets. You know. Paradigms

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Speaker 1: in essence are so deeply ingrained in people's brains they

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Speaker 1: can't even imagine at times that there could be anything else.

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Speaker 1: And so, like I said, since paradigms, people don't give

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Speaker 1: up their paradigms easily. The only thing that gets people

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Speaker 1: to give them up is time. Now, the financial stocks

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Speaker 1: that was quick because they utterly collapsed. But that's unusual.

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Speaker 1: It's not like it's not like in the nineties the

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Speaker 1: conglomerates collapse. They didn't collapse. Their earnings growth slowed, and

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Speaker 1: you know, people expected the earnings growth to re accelerate

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Speaker 1: and it didn't. So, you know, take Ge. You know,

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Speaker 1: Ge was a star for almost all the nine d

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Speaker 1: s and then when Emil took over just before nine eleven,

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Speaker 1: it's deteriorated. You know, one of probably one of the

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Speaker 1: best trades in the world would have been owning Amazon

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Speaker 1: and shorting g Right. You know, it's funny, Tracy, I

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Speaker 1: actually went I mentioned open Door. I got it kind

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Speaker 1: of wrong. I said it was at twelve and it

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Speaker 1: was a thirty five dollar stock that went to a dollar.

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Speaker 1: So I was sort of understating the scale of the collapse.

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Speaker 1: But more importantly, let's talk about open Doors. Let's get

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Speaker 1: right into it. So open Door had a business model

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Speaker 1: where they would buy homes, fix them up, and try

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Speaker 1: to sell them quickly. Now, when you think about it,

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Speaker 1: that business model only works if housing prices are going up.

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Speaker 1: If housing prices are going down, it's a disaster. Um.

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Speaker 1: So I never thought it was a real business model.

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Speaker 1: It was a timing model. And I think the reason

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Speaker 1: why the stock got crushed last year is because, I mean,

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Speaker 1: housing hasn't collapsed in the United States, but it's kind

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Speaker 1: of locked and housing prices have gone down, so it's

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Speaker 1: hard to sell and be you're selling for less, and

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Speaker 1: that's why Open Doors down so much. But you know

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Speaker 1: what it came out. It was another one of these

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Speaker 1: speculative going to conquer the world stocks until it wasn't.

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Speaker 1: I definitely want to talk more to you about housing

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Speaker 1: and real estate in a second, but just on the

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Speaker 1: paradigm shift. You know, when I think about the paradigm

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Speaker 1: of the past couple of years, you mentioned low interest

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Speaker 1: rates and that helping to boost valuations, but I also

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Speaker 1: think about momentum and people just identifying the thing that

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Speaker 1: they think other people are going to buy and then

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Speaker 1: pouring into that and so having a lot of valuations

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Speaker 1: driven by flows. Can you talk about that behavior in

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Speaker 1: the market. I call this what I call it this

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Speaker 1: the Amazon disease. I'm not saying Amazon is a bad company.

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Speaker 1: It's a great company. What I mean by the Amazon diseases,

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Speaker 1: you know, and when Amazon came public, there was a

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Speaker 1: lot of skepticism that this work. And Amazon has basically

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Speaker 1: conquered the world, and so people are always looking for

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Speaker 1: the next Amazon. And you know that they're looking for

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Speaker 1: the next Amazon when they just when they write when

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Speaker 1: when the cell side writes a research report and the

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Speaker 1: first sentences the TAM is huge, which means the total

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Speaker 1: available market is huge. Well, you know, take open door again.

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Speaker 1: Housing is huge. I mean, there's no question that housing

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Speaker 1: is huge. But that doesn't mean people's business models are

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Speaker 1: going to conquer housing. But people are constantly you know, again,

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Speaker 1: when rates or zero, you're paid to speculate. So you

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Speaker 1: look at open door and you say, well, the housing

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Speaker 1: market in the United States is I don't know, a

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Speaker 1: trillion to whatever, it is a trillion to trillion. If

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Speaker 1: open Door only gets one cent of that market, the

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Speaker 1: stock is huge. And as long as revenue growth is strong,

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Speaker 1: people are willing to make that bet. When revenue growth

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Speaker 1: starts to slow, they they get they don't think about

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Speaker 1: the TAM anymore. They start to think about the business model.

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Speaker 1: So you know, in two thousand and ten through tooth

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Speaker 1: beginning of two thousand and twenty two, if you were

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Speaker 1: a company that had no earnings that strong revenue growth,

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Speaker 1: people dream the dream. When the revenue grow slows, people

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Speaker 1: stopped dreaming the dream. Or combination of that with higher

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Speaker 1: rates and the discounting mechanism takes down the stock. You know,

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Speaker 1: even companies that did well last you went down because

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Speaker 1: of the discounting mechanism. So let's say we are at

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Speaker 1: this paradigm shift and we don't know what it's gonna be.

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Speaker 1: We don't know what it's gonna look like, but something

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Speaker 1: that's not speculative tech will be the new leadership, presumably

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Speaker 1: for a while. As an investor, like, do you feel

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Speaker 1: like you can wait and sort of see what it

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Speaker 1: is and like let the market kind of decide, or

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Speaker 1: do you feel like an impulse to try to anticipate

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Speaker 1: today what that thing. I think you anticipate a little bit,

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Speaker 1: you know. So, for example, I think one of the

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Speaker 1: themes for the next several year is what I would

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Speaker 1: call the ressoring of the industrial world back into the

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Speaker 1: United States. So, you know, for the last call it

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Speaker 1: thirty years, companies have essentially sent their supply lines out

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Speaker 1: to the inside the United States because labor in the

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Speaker 1: United States is expensive and labor in China and Vietnam

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Speaker 1: is cheap, and that worked for a very long time,

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Speaker 1: and it was very deflationary. And COVID proved one thing. Yes,

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Speaker 1: that supply chain is less expensive, but it's also very brittle.

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Speaker 1: And because of what happened during COVID, people are companies

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Speaker 1: are bringing back the supply chain, at least partially back

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Speaker 1: to the United States. So, you know, stocks that haven't

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Speaker 1: done anything in twenty years, let's say, might start to

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Speaker 1: do well, like b HP, iron ore, etcetera. That's one

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Speaker 1: theme that I think will last a long time. Greenisfication

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Speaker 1: I think will last a long time. Although some of

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Speaker 1: those stocks have no earnings and high revenue growth, I

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Speaker 1: never quite know what to make of them. But there

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Speaker 1: are other ways to play the same theme. You know,

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Speaker 1: their companies I won't mention any names, but their companies

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Speaker 1: that are that are well, let's call them normal, that

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Speaker 1: are helping rebuild the infrastructure of the United States and

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Speaker 1: the electrification of the United States, etcetera. So those are

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Speaker 1: things you could start to look at. So that's actually

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Speaker 1: something that we've spoken quite a lot about on all

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Speaker 1: lots of this idea of a sort of shift from

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Speaker 1: I guess ephemerate tech software to the reality of actual things.

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Speaker 1: This might be a slightly weird question, but do you

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Speaker 1: think investors are well positioned or well informed to grasp

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Speaker 1: that shift, because I imagine there must be a fundamental

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Speaker 1: difference between looking at a tech company versus say, I

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Speaker 1: don't know, in an oil major or something like that. Oh,

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Speaker 1: I don't think people are prepared yet. You know, they've

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Speaker 1: owned tech stocks for so long. You know, they look

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Speaker 1: at revenue growth, they look at e v D. But uh,

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Speaker 1: you know, one of the things that I find astonishing,

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Speaker 1: for example, about tech stocks is they don't include stock

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Speaker 1: based compensation and earnings, which I just find a little weird.

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Speaker 1: And because I would always ask, do you deduct stock

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Speaker 1: based competence? Stock based come from your taxes? And the

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Speaker 1: ends to that is always yeah, So in that sense

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Speaker 1: it's real, but when the report earnings, they pretend it's

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Speaker 1: not real. But the market doesn't seem to care. But

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Speaker 1: I think it's going to take time, you know, like I,

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Speaker 1: like I always talked about before some of these very

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Speaker 1: speculative stocks are up this year, it's going to take

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Speaker 1: time for people to start to do I think research

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Speaker 1: on other stuff. I know you weren't investing yet at

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Speaker 1: this point. But you know, as a student of market history,

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Speaker 1: was there the same process like with the like earlier

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Speaker 1: tech bubbles, like in the sixties, with the aerospace stocks

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Speaker 1: and some of those other waves. I mean, I was

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Speaker 1: in great school, and that's what I'm saying. No, I

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Speaker 1: figured out. But I although the two of you, I

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Speaker 1: don't think we're alive back then. Um. You know, I

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Speaker 1: think if you look at economic history, probably it's true.

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Speaker 1: I haven't really looked at that much. But you know,

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Speaker 1: in the in the late seventies, the group that people

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Speaker 1: wanted to own work whil stocks. Oil stocks haven't done

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Speaker 1: well for god knows how many years until basically the

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Speaker 1: last two Now let's talk about old stocks for a second.

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Speaker 1: You know, pipeline stocks, oil stocks. You know, why did

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Speaker 1: they do so poorly? This is not a paradigm shift.

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Speaker 1: This is a shareholder's revolt issue. So you know, if

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Speaker 1: you look back, call it two thousand and ten through

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Speaker 1: maybe two thousand eighteen or so. And this is where

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Speaker 1: I would say incentives trump ethics every time. So the

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Speaker 1: people who ran these companies where it was the midstream

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Speaker 1: pipelines or the drillers the c e O s of

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Speaker 1: those companies were all compensated essentially on volume, so it

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Speaker 1: didn't matter whether the oil prices with thirty or they're

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Speaker 1: all prices were eighty. They kept growing their production and

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Speaker 1: in most cases they basically never made money whether oil

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Speaker 1: prices with thirty or prices were eighty. And at some

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Speaker 1: poll point, probably around two thousand and sixteen, when the

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Speaker 1: group got crushed, I think that the shareholders literally revolted

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Speaker 1: and they went to these managements and said enough and

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Speaker 1: you have to change your compensation to R O E, etcetera.

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Speaker 1: And the stocks have done pretty well since that, especially

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Speaker 1: in the last two years, because the way they operate

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Speaker 1: now is they basically planned their business models for oil

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Speaker 1: prices as something like fifty to sixty, and if oil

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Speaker 1: prices are above they return the money to shareholders, which

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Speaker 1: is one of the reasons why despite the fact that

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Speaker 1: all prices were so high last year, those same companies

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Speaker 1: did not increase their production that much. Now, some people

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Speaker 1: accused the Biden administration of this. I don't think it

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Speaker 1: has anything to do with the Biden administration. Has to

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Speaker 1: do with the change and incentive structure for these companies.

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Speaker 1: Incentives trumping ethics is such a good line and I'm

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Speaker 1: definitely going to steal it from you at some point, Steve,

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Speaker 1: you can play giarize. You don't even a the quotemak.

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Speaker 1: Thank you. I think I appreciate that, um I have

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Speaker 1: a full license on that line. You know, given your background,

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Speaker 1: I think we would be remissed to not talk a

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Speaker 1: little bit about financial risk and financial stability. And this

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Speaker 1: is something that has come up over the past year

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Speaker 1: with the FED raising interest rates so rapidly, and yet

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Speaker 1: we haven't actually seen a significant break Is the system fixed?

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Speaker 1: Is it just not going to come that big breakage

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Speaker 1: that you know some people have been anticipating for a while. Well,

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Speaker 1: I can't say that they won't be breakage any anywhere

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Speaker 1: that I mean, there always could be breakage. What I

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Speaker 1: would say definitively is that there will not be breakage

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Speaker 1: in the US financial system, especially in the banks. We

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Speaker 1: can owe that to one person, which is Daniel Tarullo,

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Speaker 1: who was the first Vice Chairman in charge of Financial

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Speaker 1: Supervision at the FED, which was a position that was

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Speaker 1: created only from Dodd Frank and he was given the job.

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Speaker 1: Although it's funny he was never actually officially appointed to

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Speaker 1: the job, because you know, it makes it. He'd have

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Speaker 1: to testify in front of the Senate. It would have

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Speaker 1: been difficult, but he he was essentially given the job anyway,

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Speaker 1: and he really took the banks. He was very harsh

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Speaker 1: what he did to them. The banks objected to literally

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Speaker 1: kicking and screaming, but today they probably all thank him.

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Speaker 1: There are two things that he did. He reduced leverage

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Speaker 1: in the banks enormously, and even within that leverage, he

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Speaker 1: made them cut off the tails of risk. So, just

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Speaker 1: to give you an example, City Group before the crisis,

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Speaker 1: if you included all the off balance sheets stuff that

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Speaker 1: eventually came back on balance sheet, it was probably levered

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Speaker 1: anywhere from thirty five to forty to one, and by

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Speaker 1: the time he was on it was lever tent to one. Now,

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Speaker 1: for listeners, that may not mean that much. You know,

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Speaker 1: forty to ten, you know, those are just numbers. But

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Speaker 1: the way I would describe it is, when you're levered

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Speaker 1: forty to one, to destroy the bank, you need a pebble,

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Speaker 1: but when the bank is levered ten to one, you

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Speaker 1: need a meteor. So now we could have worst credit

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Speaker 1: in the United States, Although that really hasn't happened yet,

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Speaker 1: So under those circumstances, the banks would earn less. But

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Speaker 1: I would say other than a couple of banks, not

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Speaker 1: one bank in the United States will lose money. M hm.

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Speaker 1: I seem to remember, weren't you one of the few

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Speaker 1: people that read all of Dodd Frank from like front

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Speaker 1: to back. I think it was two thousand pages? Or well,

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Speaker 1: that's not true, that's a myth. Okay, So you're talking

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Speaker 1: about finding controls stability, but you know, we also touched

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Speaker 1: on real estate earlier, and again, you know, you you

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Speaker 1: sort of characterized the housing market it's kind of in

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Speaker 1: a freeze. Maybe it's already stabilized a little bit, but

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Speaker 1: with rage having shot up so much, I mean, like,

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Speaker 1: how are you thinking about like housing and where it's

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Speaker 1: going to go? And can like, can it stabilize with

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Speaker 1: such a repricing of mortgages in a short period of time? Um?

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Speaker 1: I mean sure it can reprice, it takes time. I

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Speaker 1: did a small calculation when mortgage rates got to seven,

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Speaker 1: which was if you calculated the monthly payment of someone

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Speaker 1: who bought a home with a three percent mortgage versus

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Speaker 1: someone who wants to buy the same home at the

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Speaker 1: same price with the same mortgage at seven percent. For

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Speaker 1: that person to have the same monthly payment as the

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Speaker 1: person with a three percent mortgage, the price of the

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Speaker 1: house has to go down from now. As long as

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Speaker 1: people are employed, they're not going to sell their home down.

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Speaker 1: They'll just live in their home. So housing prices have

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Speaker 1: come down some, but it's still the case I think

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Speaker 1: that the housing market is locked. Let's say you want

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Speaker 1: to you have a small home. You got a couple

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Speaker 1: of kids now, so you want to sell your house

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Speaker 1: and you want to buy a larger house. You can't.

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Speaker 1: You're stuck, so you're buy bunk beds. But well, it's

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Speaker 1: nothing wrong with that. But not only is housing locked.

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Speaker 1: You know, building suppliers have you know, less ability to

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Speaker 1: sell their products because housing is not turning over. So

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Speaker 1: that would be a short area. But I'm not going

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Speaker 1: to give you any names. So this is actually something

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Speaker 1: that I've been thinking about a little bit, which is

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Speaker 1: house prices are sort of being supported by a liquidity

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Speaker 1: at the moment right And I don't think they's supported

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Speaker 1: by a liquidity. I think they're being supported by employment.

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Speaker 1: You know, Like I said, if if you're you have

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Speaker 1: a three percent mortgage, so your monthly payment is very

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Speaker 1: very low. You have a job, you don't have to

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Speaker 1: sell your house. You're just not going to sell it

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Speaker 1: down a lot, so you just sit there and hope

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Speaker 1: that eventually people will get used to a seven percent

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Speaker 1: mortgage and you can sell your home. But that can

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Speaker 1: take a long time. That's fair. What I was going

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Speaker 1: to ask about is recent events that we've seen with

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Speaker 1: the Real Estate Investment Trust. And we're recording this on

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Speaker 1: February first, Blackstone just announced that it hit a monthly

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Speaker 1: redemption limit. Is there going to be what was the number?

428
00:25:31,480 --> 00:25:37,000
Speaker 1: Did they say, okay, that was in line with people's expectations.

429
00:25:37,080 --> 00:25:41,400
Speaker 1: I think it's not a great number. And they have gates,

430
00:25:42,160 --> 00:25:44,800
Speaker 1: so I forget what the number is, but you can't

431
00:25:44,800 --> 00:25:47,520
Speaker 1: withdraw five billion in a month. It's probably I don't know,

432
00:25:47,640 --> 00:25:52,800
Speaker 1: five millions something like that maybe, so you know, they

433
00:25:52,800 --> 00:25:55,000
Speaker 1: have gates. But this is kind of where I was

434
00:25:55,040 --> 00:25:58,720
Speaker 1: going with a liquidity point, right. I mean, you know,

435
00:25:58,800 --> 00:26:01,880
Speaker 1: let'st's talk about the black drown you know, private read.

436
00:26:02,119 --> 00:26:05,360
Speaker 1: So I'm not being critical to Blackstone, but when when

437
00:26:05,400 --> 00:26:09,560
Speaker 1: you think about the structure of that read, it has

438
00:26:09,640 --> 00:26:13,600
Speaker 1: what i'd call an asset liability mismatch, meaning you're investing

439
00:26:13,760 --> 00:26:18,520
Speaker 1: in real estate. Those investments could be good, but they're

440
00:26:18,560 --> 00:26:21,159
Speaker 1: a liquid so it's not like you can sell a

441
00:26:21,200 --> 00:26:26,640
Speaker 1: building overnight, but your your liabilities, meaning your investors, can

442
00:26:26,720 --> 00:26:30,720
Speaker 1: withdraw money every single month, so if the withdrawals get

443
00:26:30,800 --> 00:26:32,640
Speaker 1: too bad, you can have to sell some of your

444
00:26:32,680 --> 00:26:36,920
Speaker 1: real estate. Now, Blackstone has a very good reputation, so

445
00:26:37,000 --> 00:26:39,200
Speaker 1: it might be fine. But I think what happened last

446
00:26:39,280 --> 00:26:41,960
Speaker 1: year with that it's called the be read, is that

447
00:26:42,920 --> 00:26:48,040
Speaker 1: about of the Breads investors were from Asia, and those

448
00:26:48,080 --> 00:26:55,080
Speaker 1: Asian investors got from some investment banks enormous leverage to invest,

449
00:26:55,760 --> 00:26:58,800
Speaker 1: and given what the markets did last year, they got

450
00:26:58,840 --> 00:27:01,640
Speaker 1: margin calls and they to, you know, withdraw money from

451
00:27:01,640 --> 00:27:04,240
Speaker 1: Blackstone to pay off their margin calls. Now, how much

452
00:27:04,280 --> 00:27:06,560
Speaker 1: more that's going to take place in the next several months,

453
00:27:06,560 --> 00:27:26,480
Speaker 1: I have no idea. So we talked about how investors

454
00:27:26,920 --> 00:27:29,600
Speaker 1: leave the old paradigm kicking and screaming, But I'm thinking

455
00:27:29,680 --> 00:27:32,560
Speaker 1: also about scars from the past. And I feel like

456
00:27:32,600 --> 00:27:35,240
Speaker 1: people listening to here like there's some liquid fund and

457
00:27:35,280 --> 00:27:39,600
Speaker 1: there's some margin call, and there's this real people ganking

458
00:27:39,640 --> 00:27:41,720
Speaker 1: their money out and they're like, they reached for the

459
00:27:41,760 --> 00:27:45,400
Speaker 1: two thou seven playbook in their minds and the two eight.

460
00:27:45,640 --> 00:27:48,720
Speaker 1: To what degree do you think memories of that crisis

461
00:27:49,119 --> 00:27:52,520
Speaker 1: are still informing how investors think about and try to

462
00:27:52,560 --> 00:27:55,720
Speaker 1: assess the market today. Oh, I think two thousand and

463
00:27:55,760 --> 00:27:58,920
Speaker 1: two thousand eight for some investors is like PTSD. Look,

464
00:27:58,960 --> 00:28:02,199
Speaker 1: financials are implicated. There aren't a lot of people on

465
00:28:02,280 --> 00:28:06,879
Speaker 1: planet Earth who really understand how much the financial structure

466
00:28:06,960 --> 00:28:09,600
Speaker 1: of the United States and Europe has really changed. So

467
00:28:09,760 --> 00:28:12,160
Speaker 1: they see they see the markets go down, and they

468
00:28:12,160 --> 00:28:15,080
Speaker 1: say to themselves, oh, my god, something bad is going

469
00:28:15,160 --> 00:28:18,600
Speaker 1: to happen. Now, something bad could happen. You know, we

470
00:28:18,640 --> 00:28:21,879
Speaker 1: could have a recession. But my feeling is will have

471
00:28:22,640 --> 00:28:24,960
Speaker 1: an old fashioned run of the mill recession. We're not

472
00:28:25,000 --> 00:28:29,879
Speaker 1: going to have some enormous, you know, meltdown crisis where

473
00:28:29,880 --> 00:28:32,359
Speaker 1: the system is completely at risk, which is what happened

474
00:28:32,359 --> 00:28:34,760
Speaker 1: in a way before you forget I mean you use

475
00:28:34,880 --> 00:28:38,080
Speaker 1: the pebble versus meteor analogy. Can you just explain, like,

476
00:28:38,200 --> 00:28:40,960
Speaker 1: what is it about the nature of US banks? Now

477
00:28:41,600 --> 00:28:45,320
Speaker 1: there you say they cannot lose money, Well, you're level

478
00:28:45,320 --> 00:28:49,040
Speaker 1: at forty two one. You know what happened in the

479
00:28:49,040 --> 00:28:51,920
Speaker 1: financial crisis. One of the things that's very important, and

480
00:28:53,280 --> 00:28:56,400
Speaker 1: getting back to my line which I've donated to you,

481
00:28:56,560 --> 00:29:01,320
Speaker 1: incentives trump ethics every time, is there there's a concept

482
00:29:01,320 --> 00:29:05,880
Speaker 1: called risk weighted assets where the system, you know, the

483
00:29:05,880 --> 00:29:10,120
Speaker 1: regulatory system, tried to merge the concept of leverage with

484
00:29:10,280 --> 00:29:13,440
Speaker 1: risk and so every asset on the balance sheet got

485
00:29:13,440 --> 00:29:18,440
Speaker 1: a risk weight, and so when regulators and companies calculated leverage,

486
00:29:18,920 --> 00:29:23,720
Speaker 1: it wasn't assets divided by equity, it was risk weighted

487
00:29:23,720 --> 00:29:26,200
Speaker 1: assets divided by equity. So if you look at Europe,

488
00:29:26,240 --> 00:29:29,480
Speaker 1: for example, where you know the banks are much more uniform,

489
00:29:29,560 --> 00:29:33,000
Speaker 1: from two thousand and seven, I'm sorry, from through two

490
00:29:33,000 --> 00:29:36,760
Speaker 1: thousand and seven, absolute leverage in the banks in Europe

491
00:29:36,960 --> 00:29:41,000
Speaker 1: went up three times, but on a risk weighted asset basis,

492
00:29:41,040 --> 00:29:45,680
Speaker 1: they were flat. So a lot of the executives who

493
00:29:45,720 --> 00:29:48,120
Speaker 1: ran these companies, when they looked at their balance sheet,

494
00:29:48,160 --> 00:29:50,400
Speaker 1: they said, oh, our leverage is the same when an

495
00:29:50,440 --> 00:29:53,760
Speaker 1: actuality was much higher and they had a lot of

496
00:29:53,840 --> 00:29:55,560
Speaker 1: risk on their balance sheets. They had a lot of

497
00:29:55,560 --> 00:29:59,880
Speaker 1: subprime assets of various kinds, which all blew up in

498
00:30:00,000 --> 00:30:02,640
Speaker 1: their face. And so because they were levered so much,

499
00:30:03,440 --> 00:30:07,160
Speaker 1: they essentially died. The only reason why they survived because

500
00:30:07,200 --> 00:30:11,440
Speaker 1: they were bailed out. So today, not only is the

501
00:30:11,520 --> 00:30:14,760
Speaker 1: absolute leverage lower, like I said, City has come from

502
00:30:14,760 --> 00:30:18,000
Speaker 1: thirty five to forty times too went to ten. Maybe

503
00:30:18,040 --> 00:30:23,760
Speaker 1: today it's twelve, but the type of risk that they take,

504
00:30:24,320 --> 00:30:28,000
Speaker 1: generally speaking, is far far lower because the regulators who

505
00:30:28,160 --> 00:30:32,360
Speaker 1: essentially live in these banks are not allowing them to

506
00:30:32,480 --> 00:30:37,480
Speaker 1: take enormous types of risk in their loan books. So look,

507
00:30:37,520 --> 00:30:40,960
Speaker 1: the system, like I said, is probably safe for the

508
00:30:41,000 --> 00:30:44,640
Speaker 1: first time in my lifetime in that sense, But I

509
00:30:44,680 --> 00:30:47,320
Speaker 1: don't think a lot of people really understand that that's

510
00:30:47,360 --> 00:30:51,360
Speaker 1: the case. You know, you mentioned investors getting PTSD from

511
00:30:51,600 --> 00:30:53,760
Speaker 1: two thousand and eight, and it's sort of informing and

512
00:30:53,800 --> 00:30:57,240
Speaker 1: affecting their subsequent behavior. And I don't think you got

513
00:30:57,280 --> 00:30:59,760
Speaker 1: PTSD because you made a lot of money out of it,

514
00:30:59,800 --> 00:31:04,280
Speaker 1: but it was a defining moment of your career. How

515
00:31:04,320 --> 00:31:09,600
Speaker 1: did you yourself move past that particular era? And what

516
00:31:09,640 --> 00:31:12,240
Speaker 1: I mean by that is there are people out there

517
00:31:12,640 --> 00:31:14,200
Speaker 1: who made a lot of money in two thousand and

518
00:31:14,240 --> 00:31:18,200
Speaker 1: eight who subsequently every year had been issuing warnings about

519
00:31:18,240 --> 00:31:20,240
Speaker 1: how the entire market is going to fall apart. The

520
00:31:20,240 --> 00:31:22,840
Speaker 1: financial system is going to collapse. How did you move

521
00:31:22,880 --> 00:31:27,480
Speaker 1: past that? Great question? A lot of therapy? Uh no, no,

522
00:31:27,560 --> 00:31:32,920
Speaker 1: I I where I got past it was well, I

523
00:31:32,920 --> 00:31:36,440
Speaker 1: actually got friendly with Daniel Torulo, so I watched what

524
00:31:36,520 --> 00:31:40,880
Speaker 1: he did very very closely, and you know, I realized

525
00:31:40,960 --> 00:31:47,080
Speaker 1: that what he'd accomplished was actually astonishing, and so the system,

526
00:31:47,160 --> 00:31:50,040
Speaker 1: you know, was fine. What what I didn't anticipate until

527
00:31:50,200 --> 00:31:53,080
Speaker 1: years later was that because the FED cut rates, you

528
00:31:53,120 --> 00:31:55,200
Speaker 1: were paid to take so much risk, you could do

529
00:31:55,360 --> 00:31:58,120
Speaker 1: what you wanted to do was buy companies with no earnings.

530
00:31:58,640 --> 00:32:00,480
Speaker 1: That was much harder to make that shift. But I

531
00:32:00,560 --> 00:32:02,600
Speaker 1: didn't think that the financial system was going to go

532
00:32:02,680 --> 00:32:07,240
Speaker 1: down again. Yeah, it really is extraordinary, Like how I

533
00:32:07,280 --> 00:32:09,160
Speaker 1: mean you see it's still you know, like what was

534
00:32:09,200 --> 00:32:11,920
Speaker 1: it credit sweets a few months ago? Like people are

535
00:32:12,000 --> 00:32:15,440
Speaker 1: just not able to get past this sort of like yeah,

536
00:32:15,640 --> 00:32:18,040
Speaker 1: great financial I wasn't going to name any names job,

537
00:32:18,160 --> 00:32:19,880
Speaker 1: nobody was just like people were like it was in

538
00:32:19,960 --> 00:32:22,360
Speaker 1: the headlines and stuff, and you know, people just like

539
00:32:22,440 --> 00:32:26,880
Speaker 1: reach for those old analogies. So just looking back at

540
00:32:26,920 --> 00:32:29,760
Speaker 1: your career, you know, you're very long and illustrious career,

541
00:32:29,880 --> 00:32:34,280
Speaker 1: But what was your flattering Yeah, what was your most

542
00:32:34,560 --> 00:32:38,560
Speaker 1: shocking moment, Like what surprised you the most, Whether it

543
00:32:38,600 --> 00:32:42,440
Speaker 1: was a company that you know failed or maybe succeeded,

544
00:32:42,840 --> 00:32:47,200
Speaker 1: or the particular behavior by someone or an entity. Well,

545
00:32:47,240 --> 00:32:50,400
Speaker 1: what surprised me the most was what happened in O eight.

546
00:32:52,160 --> 00:32:58,200
Speaker 1: I thought that surely the regulators knew what I knew.

547
00:32:58,760 --> 00:33:02,600
Speaker 1: How could they not because they had much more information

548
00:33:02,640 --> 00:33:07,080
Speaker 1: than I did. And it became very very clear as

549
00:33:07,120 --> 00:33:10,960
Speaker 1: OH eight went on that they didn't really understand what

550
00:33:11,120 --> 00:33:13,760
Speaker 1: was going on until it was too late. And I

551
00:33:13,800 --> 00:33:21,480
Speaker 1: remember Bernanke made a speech he said something like subprime

552
00:33:21,760 --> 00:33:26,600
Speaker 1: mortgage risk is confined. And I turned to one of

553
00:33:26,640 --> 00:33:29,280
Speaker 1: my colleagues and I said, yeah, it's confined. Alright, it's

554
00:33:29,320 --> 00:33:36,640
Speaker 1: confined the planet Earth. That's funny. By the way, pay attention.

555
00:33:36,720 --> 00:33:41,840
Speaker 1: I'm laughing internally. So you know, when you read um,

556
00:33:42,000 --> 00:33:44,960
Speaker 1: I figured the book by but it was a book

557
00:33:45,160 --> 00:33:47,480
Speaker 1: that was a very early book about the financial crisis.

558
00:33:47,600 --> 00:33:53,080
Speaker 1: And there was a scene where it was the weekend

559
00:33:53,080 --> 00:33:58,880
Speaker 1: when Lehman went down, and there was a scene described

560
00:33:58,920 --> 00:34:03,560
Speaker 1: in the book where as Lehman is going down, they

561
00:34:03,600 --> 00:34:06,640
Speaker 1: know what's going down. Someone walks into the room. I mean,

562
00:34:06,680 --> 00:34:10,600
Speaker 1: I'm just paraphrasing and basically says a I G is

563
00:34:10,640 --> 00:34:14,440
Speaker 1: also in trouble, and I'm thinking this is a shock

564
00:34:14,520 --> 00:34:17,000
Speaker 1: to you a lot, Like don't you read the research?

565
00:34:17,520 --> 00:34:20,640
Speaker 1: I mean, I couldn't believe it. But that was the

566
00:34:20,640 --> 00:34:23,320
Speaker 1: most shocking thing in my career. I could not believe

567
00:34:23,960 --> 00:34:27,560
Speaker 1: that the regulators and the government really had no idea

568
00:34:27,600 --> 00:34:30,919
Speaker 1: what was going on. Can you talk a little bit

569
00:34:30,920 --> 00:34:34,160
Speaker 1: more about Like, Okay, to make any real money in

570
00:34:34,200 --> 00:34:37,680
Speaker 1: the market, there must be some sustained periods where you

571
00:34:37,719 --> 00:34:41,520
Speaker 1: have a different view than the overall mark. I don't

572
00:34:41,520 --> 00:34:45,960
Speaker 1: think that's necessarily true, you know, oh six oh seven,

573
00:34:46,000 --> 00:34:49,719
Speaker 1: oh eight, I had a very different view. Yeah. Is

574
00:34:49,760 --> 00:34:53,160
Speaker 1: that hard? Oh my god, it's ridiculously hard. The whole

575
00:34:53,160 --> 00:34:55,799
Speaker 1: world is telling you that you're an idiot, and then

576
00:34:55,840 --> 00:34:58,879
Speaker 1: sometimes you think you're an idiot. So that's hard. Well,

577
00:34:58,920 --> 00:35:00,680
Speaker 1: because like I mean, I've you know, I've been thinking

578
00:35:00,680 --> 00:35:04,080
Speaker 1: about that to like a lot of people, for example,

579
00:35:04,760 --> 00:35:06,680
Speaker 1: and I don't I don't want to like actually dive

580
00:35:06,719 --> 00:35:08,560
Speaker 1: into this specific they went a lot of people for

581
00:35:08,640 --> 00:35:11,040
Speaker 1: example of like had to deal with this in the

582
00:35:11,120 --> 00:35:14,120
Speaker 1: last year related to cryptocurrencies, where like everyone's calling them

583
00:35:14,120 --> 00:35:16,279
Speaker 1: an idiot for like not really getting it and then

584
00:35:16,520 --> 00:35:19,200
Speaker 1: maybe they're right. But that process of like being called

585
00:35:19,200 --> 00:35:22,440
Speaker 1: an idiot, maybe underperforming or missing some market move for

586
00:35:22,520 --> 00:35:25,040
Speaker 1: years and being told like you fool, don't you see

587
00:35:25,080 --> 00:35:29,520
Speaker 1: what's happening, it seems like psychologically you mentioned therapy earlier, Steve,

588
00:35:29,560 --> 00:35:31,439
Speaker 1: this is where if I had a therapist, I would

589
00:35:31,440 --> 00:35:35,399
Speaker 1: talk about abuse from bitcoiners. Well, let's let's talk about

590
00:35:35,400 --> 00:35:38,560
Speaker 1: big quarter can mean getting back to do you have

591
00:35:38,640 --> 00:35:41,040
Speaker 1: to be different? You know, from two thousand and ten

592
00:35:41,320 --> 00:35:46,160
Speaker 1: through two thousand and twenty, if you objected to high

593
00:35:46,239 --> 00:35:51,720
Speaker 1: growth stocks with no earnings and you will short them,

594
00:35:51,760 --> 00:35:55,319
Speaker 1: you'd basically be dead. So that can last a long

595
00:35:55,400 --> 00:35:58,640
Speaker 1: time even though you have a different opinion. You do

596
00:35:58,680 --> 00:36:01,040
Speaker 1: not have to have pretty good time to deal with that.

597
00:36:01,560 --> 00:36:04,480
Speaker 1: But let's talk about bitcoin. That's a great fun topic.

598
00:36:05,080 --> 00:36:11,400
Speaker 1: So I remember during COVID, you know, I was out

599
00:36:11,719 --> 00:36:14,719
Speaker 1: on Long Island in the north for basically living there,

600
00:36:14,760 --> 00:36:17,239
Speaker 1: and I would come back to the city every Tuesday

601
00:36:17,280 --> 00:36:19,719
Speaker 1: to visit my mother, and so I would drive to

602
00:36:19,760 --> 00:36:22,399
Speaker 1: the city. There would be no traffic and it would

603
00:36:22,400 --> 00:36:24,680
Speaker 1: take me about two hours. So I listened to podcasts.

604
00:36:24,719 --> 00:36:27,279
Speaker 1: What else are you gonna do? I even listened to

605
00:36:27,400 --> 00:36:31,040
Speaker 1: this podcast every now and and but one of the

606
00:36:31,200 --> 00:36:34,040
Speaker 1: group of podcasts that I listened to were the so

607
00:36:34,200 --> 00:36:39,719
Speaker 1: called experts on bitcoin. And there are always two questions

608
00:36:39,800 --> 00:36:44,960
Speaker 1: that I had. Number one, why is bitcoin a currency?

609
00:36:45,280 --> 00:36:49,120
Speaker 1: And number two, Okay, it's a currency, but how should

610
00:36:49,120 --> 00:36:54,160
Speaker 1: it trade now? On every single podcast, they completely skipped

611
00:36:54,200 --> 00:36:58,360
Speaker 1: over the why is it a currency issue? That was

612
00:36:58,400 --> 00:37:00,960
Speaker 1: like that was just a given, and that's not given

613
00:37:01,000 --> 00:37:02,960
Speaker 1: to me. We can get back to that, but it

614
00:37:03,040 --> 00:37:05,760
Speaker 1: was a given. The second part of the story about

615
00:37:05,800 --> 00:37:08,680
Speaker 1: how should bitcoin act, they all had the same opinion,

616
00:37:09,280 --> 00:37:14,480
Speaker 1: which was fear currency, which is government issued currency, has

617
00:37:14,520 --> 00:37:17,799
Speaker 1: been terribly debased because of all the deficits that all

618
00:37:17,840 --> 00:37:22,800
Speaker 1: these countries have issued. But it's very hard to short

619
00:37:22,880 --> 00:37:26,280
Speaker 1: fear currency because they all trade relative to one another.

620
00:37:26,560 --> 00:37:30,920
Speaker 1: So if you short the dollar, your problem is that

621
00:37:31,040 --> 00:37:36,040
Speaker 1: in in a basketball team where everybody's five four, the

622
00:37:36,120 --> 00:37:39,719
Speaker 1: dollar is five eleven. So it's hard to short the

623
00:37:39,760 --> 00:37:43,479
Speaker 1: dollar because it's it's taller than the other currencies. Even

624
00:37:43,480 --> 00:37:48,600
Speaker 1: though quote unquote has been debased. So therefore you should

625
00:37:48,600 --> 00:37:53,840
Speaker 1: buy bitcoin as a hedge against the debasement of all currencies. Okay,

626
00:37:53,840 --> 00:37:57,160
Speaker 1: so let's accept that theory for a second. If that's

627
00:37:57,200 --> 00:38:01,800
Speaker 1: the case, then bitco point should go up when people

628
00:38:01,840 --> 00:38:05,960
Speaker 1: are nervous and rates are going up, and Bitcoin should

629
00:38:05,960 --> 00:38:09,840
Speaker 1: go down when rates are going down. Every everybody feels good.

630
00:38:10,600 --> 00:38:14,080
Speaker 1: And the problem was it actually did the opposite. It

631
00:38:14,120 --> 00:38:17,960
Speaker 1: would go up with everything else speculative, and it would

632
00:38:17,960 --> 00:38:21,160
Speaker 1: go down with everything else speculative. So what was the point.

633
00:38:22,400 --> 00:38:25,439
Speaker 1: So you know, Bitcoin is up a lot this year

634
00:38:25,600 --> 00:38:28,440
Speaker 1: because it's up a lot with everything else speculative. Now,

635
00:38:29,000 --> 00:38:35,239
Speaker 1: you can't have a currency that moves every six months.

636
00:38:35,280 --> 00:38:38,759
Speaker 1: That's not a currency, that's a speculation. And the thing

637
00:38:38,800 --> 00:38:44,040
Speaker 1: I don't understand about bitcoin is what problem is it solving?

638
00:38:45,160 --> 00:38:48,200
Speaker 1: You know, is there a problem with currency? I mean,

639
00:38:48,200 --> 00:38:50,560
Speaker 1: the last time you went to the store and you

640
00:38:50,560 --> 00:38:52,680
Speaker 1: you pulled out a twenty dollar bill, you paid with

641
00:38:52,719 --> 00:38:55,440
Speaker 1: your credit card, did the store owners say, oh, no,

642
00:38:55,560 --> 00:38:58,200
Speaker 1: I don't take dollars. I mean, it's not even an issue.

643
00:38:58,760 --> 00:39:01,879
Speaker 1: And by the way, the currency markets are the most

644
00:39:01,920 --> 00:39:04,440
Speaker 1: liquid markets in the world. You know, I like to say,

645
00:39:04,520 --> 00:39:09,280
Speaker 1: how long does it take to buy dollar? Euro? Done?

646
00:39:10,200 --> 00:39:12,719
Speaker 1: A billion dollars done? That's how quickly it is. So

647
00:39:13,080 --> 00:39:18,600
Speaker 1: I don't understand what bitcoin solves. And I don't understand

648
00:39:19,000 --> 00:39:21,520
Speaker 1: the purpose of owning it other than it's another form

649
00:39:21,600 --> 00:39:25,239
Speaker 1: of speculation. So I just don't get it. So you

650
00:39:25,280 --> 00:39:27,959
Speaker 1: mentioned speculation and COVID, and I mean this was something

651
00:39:27,960 --> 00:39:31,000
Speaker 1: that played into a lot of the cryptocurrency boom, this

652
00:39:31,040 --> 00:39:33,480
Speaker 1: idea that you know, people are stuck at home their board,

653
00:39:33,680 --> 00:39:36,880
Speaker 1: maybe they got some extra money thanks to the US government,

654
00:39:36,920 --> 00:39:39,399
Speaker 1: and they're using it to trade. When you look at

655
00:39:39,440 --> 00:39:43,320
Speaker 1: consumers now, and I know at various points in time

656
00:39:43,520 --> 00:39:46,400
Speaker 1: you've had positions in subprime auto lending and some consumer

657
00:39:46,480 --> 00:39:48,920
Speaker 1: facing things like that, But how would you characterize the

658
00:39:49,000 --> 00:39:51,600
Speaker 1: US consumer because this is also something that comes up

659
00:39:51,640 --> 00:39:57,360
Speaker 1: as people talk about a potential recession in So let's

660
00:39:57,640 --> 00:40:03,000
Speaker 1: just say that over the last several years, credit quality

661
00:40:03,040 --> 00:40:07,200
Speaker 1: on the consumer side in the United States, the delinquencies

662
00:40:07,200 --> 00:40:10,120
Speaker 1: and losses got so low they were they've been lower

663
00:40:10,160 --> 00:40:15,480
Speaker 1: than any time and basically in history. So do I

664
00:40:15,640 --> 00:40:20,800
Speaker 1: think there's going to be a normalization of delinquencies and losses.

665
00:40:21,520 --> 00:40:24,120
Speaker 1: I mean, I think that Jamie Diamond said that on

666
00:40:24,160 --> 00:40:26,680
Speaker 1: the most recent conference goal of JP Morgan, But you

667
00:40:26,719 --> 00:40:30,120
Speaker 1: really haven't seen it yet. So some are still in

668
00:40:30,160 --> 00:40:32,920
Speaker 1: pretty good shape, you know, as long as everybody's got

669
00:40:32,920 --> 00:40:36,359
Speaker 1: a job. People will pay off their debts, So it's

670
00:40:36,360 --> 00:40:39,439
Speaker 1: really a question of unemployment. If unemployment goes up, you'll

671
00:40:39,480 --> 00:40:42,960
Speaker 1: see an increase in delinquencies and losses. But it's not

672
00:40:43,040 --> 00:40:45,680
Speaker 1: going to be a calamity. It's just going to be

673
00:40:45,719 --> 00:40:49,160
Speaker 1: what i'd call a normalization. So what are you sort

674
00:40:49,160 --> 00:40:52,239
Speaker 1: of looking for next? I mean, you you mentioned that

675
00:40:52,719 --> 00:40:55,520
Speaker 1: at the beginning of the conversation, like there's still some ambiguity,

676
00:40:55,640 --> 00:40:57,400
Speaker 1: is like, oh, it's the FED you know later and

677
00:40:57,400 --> 00:41:00,960
Speaker 1: that you're gonna start cutting. Well, this revive the growth stocks.

678
00:41:01,000 --> 00:41:03,160
Speaker 1: What are the other signs that you would look for,

679
00:41:03,200 --> 00:41:06,680
Speaker 1: either like yes, the paradigm shift is here and happening,

680
00:41:07,160 --> 00:41:10,120
Speaker 1: and or this is the this is the sector that

681
00:41:10,200 --> 00:41:12,680
Speaker 1: really is going to define the next decade, and do

682
00:41:12,719 --> 00:41:15,719
Speaker 1: these things like is it reasonable to say they kind

683
00:41:15,719 --> 00:41:18,440
Speaker 1: of go by decades, Like if a new paradigm emerges,

684
00:41:18,560 --> 00:41:21,520
Speaker 1: that is there like a ten years as well. There's

685
00:41:21,520 --> 00:41:23,680
Speaker 1: no reason to say they go by decades. It just

686
00:41:23,719 --> 00:41:27,399
Speaker 1: happens to be historically true that they do. Um why

687
00:41:27,480 --> 00:41:29,799
Speaker 1: that's so, I don't know, but it just happens to

688
00:41:29,840 --> 00:41:34,239
Speaker 1: be the case, you know, And unfortunately, over the last

689
00:41:34,280 --> 00:41:37,360
Speaker 1: couple of years. The only thing that's mattered in the

690
00:41:37,400 --> 00:41:41,120
Speaker 1: markets is one variable, what's Powell going to do and

691
00:41:41,160 --> 00:41:45,320
Speaker 1: how much is he gonna do. There's been very little

692
00:41:46,040 --> 00:41:51,600
Speaker 1: what I call dispersion within sectors. So you know, one group,

693
00:41:52,239 --> 00:41:55,040
Speaker 1: you know, let's call it tech stocks goes up, they

694
00:41:55,120 --> 00:41:58,400
Speaker 1: all go up, and this is because of ETFs. Oil

695
00:41:58,440 --> 00:42:01,440
Speaker 1: stocks go up, they all go up. There's no, there's no,

696
00:42:01,640 --> 00:42:04,439
Speaker 1: there's not much of dispersion within groups, and that's because

697
00:42:04,440 --> 00:42:07,800
Speaker 1: everybody's so focused on rates. I think the key moment

698
00:42:07,960 --> 00:42:11,440
Speaker 1: will be, you know, the obviously the FED at some

699
00:42:11,560 --> 00:42:14,440
Speaker 1: point will stop. When that is, I don't know. The

700
00:42:14,680 --> 00:42:18,560
Speaker 1: The operative question at that point is will the Fed

701
00:42:18,840 --> 00:42:22,759
Speaker 1: keep rates there or will they cut? The market is

702
00:42:23,080 --> 00:42:26,400
Speaker 1: completely convinced that they will cut, despite the fact that

703
00:42:26,520 --> 00:42:30,000
Speaker 1: Powell says that every press conference that we're going to

704
00:42:30,120 --> 00:42:32,040
Speaker 1: leave it there. So either you take him at his

705
00:42:32,160 --> 00:42:34,760
Speaker 1: word or you don't, and we won't know until that happens.

706
00:42:35,040 --> 00:42:38,080
Speaker 1: You mentioned E t F changing the nature of how

707
00:42:38,360 --> 00:42:42,600
Speaker 1: stocks trade and the sectoral internal sectoral correlations. Is that

708
00:42:42,920 --> 00:42:46,239
Speaker 1: here for good? Oh? Definitely. I mean, I'll give you

709
00:42:46,239 --> 00:42:49,480
Speaker 1: an example. There are lots of different E t F

710
00:42:49,640 --> 00:42:52,600
Speaker 1: s or algorithms. I'll give you two stocks, and I'm

711
00:42:52,640 --> 00:42:54,600
Speaker 1: not being critical of them, but I'm just gonna give

712
00:42:54,600 --> 00:42:57,640
Speaker 1: an example of it. So you have a firm which

713
00:42:58,960 --> 00:43:01,600
Speaker 1: we discuss, which is buy now, pay later, which is

714
00:43:01,880 --> 00:43:06,279
Speaker 1: call it a quasi financial payment stock. And then there's

715
00:43:06,280 --> 00:43:09,680
Speaker 1: another stock which I'm very familiar with called Trupanion, which

716
00:43:09,840 --> 00:43:13,080
Speaker 1: is a company that does animal health insurance insurance. I

717
00:43:13,160 --> 00:43:15,560
Speaker 1: think I might have I think maybe at one point

718
00:43:15,600 --> 00:43:17,480
Speaker 1: I had had it too. I had it with them

719
00:43:17,520 --> 00:43:19,240
Speaker 1: for a little while. I have I have two dogs,

720
00:43:19,360 --> 00:43:21,640
Speaker 1: so for a while I used to have four, and

721
00:43:21,840 --> 00:43:25,239
Speaker 1: so we used Trupanion for a while. Now, when you

722
00:43:25,320 --> 00:43:27,759
Speaker 1: think about it, what does a firm have to do

723
00:43:27,880 --> 00:43:31,640
Speaker 1: with Trupanion. Nothing. I mean one's an animal health insurance

724
00:43:31,719 --> 00:43:34,719
Speaker 1: and ones in buy now, pay later. So the two

725
00:43:34,800 --> 00:43:38,279
Speaker 1: stocks literally have no overlap in their businesses. They have

726
00:43:38,480 --> 00:43:42,040
Speaker 1: nothing to do with one another. They're in different sectors, etcetera.

727
00:43:42,120 --> 00:43:44,400
Speaker 1: The only thing they have in common is that they

728
00:43:44,440 --> 00:43:48,160
Speaker 1: were high revenue growth, negative earnings companies. And I think

729
00:43:48,200 --> 00:43:50,400
Speaker 1: if you would watch the markets on a daily basis,

730
00:43:50,480 --> 00:43:53,719
Speaker 1: the correlation between the two is very high because it's

731
00:43:53,760 --> 00:43:56,120
Speaker 1: got to be in some kind of et F an algorithm,

732
00:43:56,800 --> 00:43:59,400
Speaker 1: which all right, it's but like I said, they have

733
00:43:59,640 --> 00:44:04,480
Speaker 1: nothing to do with one another, but they trade together

734
00:44:04,680 --> 00:44:07,640
Speaker 1: because there somebody's got some algorithm or et F where

735
00:44:07,640 --> 00:44:10,080
Speaker 1: they're both in there E t f s and benchmarks

736
00:44:10,120 --> 00:44:13,920
Speaker 1: turned the market into a giant blob. Steve, final question

737
00:44:14,000 --> 00:44:17,520
Speaker 1: for you, what one piece of advice would you give

738
00:44:17,760 --> 00:44:20,800
Speaker 1: investors and perhaps financial journalists as they go through this

739
00:44:21,080 --> 00:44:26,239
Speaker 1: paradigm shift. That's a tough question. I actually don't know

740
00:44:26,280 --> 00:44:31,640
Speaker 1: the answer to that. I guess skepticism. You know, you

741
00:44:31,640 --> 00:44:37,200
Speaker 1: should always be skeptical about what management say. You should

742
00:44:37,200 --> 00:44:40,160
Speaker 1: do your own whole work. That's all I would say.

743
00:44:40,480 --> 00:44:42,680
Speaker 1: I don't have what I call it leaving question that

744
00:44:42,760 --> 00:44:47,239
Speaker 1: everybody should ask. All right, Steve Eisman, wonderful having you

745
00:44:47,320 --> 00:44:49,040
Speaker 1: on a blots Thank you so much for coming on.

746
00:44:49,360 --> 00:45:07,160
Speaker 1: Thank you for having me. Thanks Steve. That's great, So Joe,

747
00:45:07,400 --> 00:45:10,640
Speaker 1: I enjoyed that conversation so much. It was sort of

748
00:45:10,840 --> 00:45:14,520
Speaker 1: wonderful to relive some of the drama of financial crisis.

749
00:45:14,760 --> 00:45:17,400
Speaker 1: But I did think the point about this idea that

750
00:45:17,680 --> 00:45:21,200
Speaker 1: I think in two everyone thought the FED raising interest

751
00:45:21,280 --> 00:45:24,320
Speaker 1: rates was such a big break in the market, and

752
00:45:24,440 --> 00:45:26,880
Speaker 1: so there's a sense of whiplash as we kind of

753
00:45:27,080 --> 00:45:29,880
Speaker 1: enter three, where we start to see some of the

754
00:45:29,960 --> 00:45:35,360
Speaker 1: things that had the most excesses of recover. It's confusing

755
00:45:35,440 --> 00:45:38,160
Speaker 1: to everyone. But Steve's point about how you know, this

756
00:45:38,520 --> 00:45:41,719
Speaker 1: isn't a sort of one direction process, and you can

757
00:45:41,880 --> 00:45:45,200
Speaker 1: get these stops and starts in a paradigm shift. I

758
00:45:45,280 --> 00:45:47,840
Speaker 1: think that was interesting. Yeah, no, it really is, like

759
00:45:47,960 --> 00:45:50,560
Speaker 1: people give up the dream. It takes a long time,

760
00:45:50,800 --> 00:45:53,680
Speaker 1: you know, even like myself and I have never been

761
00:45:53,760 --> 00:45:57,560
Speaker 1: like some like Czech cheerleader. I don't think anyone accused

762
00:45:57,600 --> 00:46:00,200
Speaker 1: me of even in myself when I think about markets, like, wait,

763
00:46:00,320 --> 00:46:02,879
Speaker 1: can like can you make money in other industries? Could

764
00:46:02,920 --> 00:46:05,960
Speaker 1: there be a period in time in which these high,

765
00:46:06,239 --> 00:46:10,560
Speaker 1: fast growing Silicon Valley companies aren't the darlings of markets,

766
00:46:10,680 --> 00:46:13,400
Speaker 1: like even you know, like I never like wanted the

767
00:46:13,480 --> 00:46:15,480
Speaker 1: cooler in the first place, but I still like it's

768
00:46:15,560 --> 00:46:18,080
Speaker 1: hard to like, you know, turn my head in a

769
00:46:18,160 --> 00:46:21,680
Speaker 1: different direction. Well, and also there's so much additional artifice

770
00:46:21,880 --> 00:46:24,279
Speaker 1: like built on top of the tech industry at this

771
00:46:24,360 --> 00:46:27,799
Speaker 1: point in time, Like there's so much media and things,

772
00:46:27,880 --> 00:46:30,239
Speaker 1: like people talk about it so much. I just can't

773
00:46:30,280 --> 00:46:33,920
Speaker 1: imagine such you know another industry, like I don't know,

774
00:46:34,080 --> 00:46:36,880
Speaker 1: some boring conglomerate that like pulls things out of the

775
00:46:36,920 --> 00:46:40,200
Speaker 1: ground something like that, having the same excitement attached to it.

776
00:46:40,280 --> 00:46:42,640
Speaker 1: I know, like are people like and even if like

777
00:46:42,719 --> 00:46:44,320
Speaker 1: we do have another like let's say we have like

778
00:46:44,400 --> 00:46:46,640
Speaker 1: a decade of oil and commodity booms, like we're gonna

779
00:46:46,680 --> 00:46:48,920
Speaker 1: have like people on Twitter like doing big threads about

780
00:46:49,520 --> 00:46:52,719
Speaker 1: just like to work at you know, Pioneer, it's like

781
00:46:52,800 --> 00:46:54,640
Speaker 1: to work I just like don't see it. It's hard

782
00:46:54,760 --> 00:46:57,439
Speaker 1: for getting excited about total market size right just steep

783
00:46:57,600 --> 00:47:02,000
Speaker 1: Town anyway, total markets as of every car owner in

784
00:47:02,080 --> 00:47:04,680
Speaker 1: the entire world. Yeah, so much goes. I've also just

785
00:47:04,840 --> 00:47:07,520
Speaker 1: I thought, you know, the part about how much safe

786
00:47:07,560 --> 00:47:10,359
Speaker 1: for the financial systems and coming from what I would

787
00:47:10,360 --> 00:47:12,879
Speaker 1: say is a very credible source on that top. Yeah,

788
00:47:12,960 --> 00:47:14,960
Speaker 1: it is something that we have been hearing repeatedly on

789
00:47:15,000 --> 00:47:17,520
Speaker 1: the podcast, and every time I hear it, I do

790
00:47:17,760 --> 00:47:20,959
Speaker 1: have that knee jerk two thousand eight PTSD reaction thinking,

791
00:47:21,000 --> 00:47:24,040
Speaker 1: oh gosh, we're going to jinx it, but hopefully we

792
00:47:24,040 --> 00:47:26,799
Speaker 1: should get Dan Tarulo. Yeah, yeah, I had the same thought.

793
00:47:26,840 --> 00:47:28,440
Speaker 1: Let's do it all right? Should we leave it there?

794
00:47:28,520 --> 00:47:31,400
Speaker 1: Let's leave it there. This has been another episode of

795
00:47:31,520 --> 00:47:34,040
Speaker 1: the All Thoughts podcast. I'm Tracy Alloway. You can follow

796
00:47:34,120 --> 00:47:37,239
Speaker 1: me on Twitter at Tracy Alloway and I'm Joe Wisnal.

797
00:47:37,320 --> 00:47:39,959
Speaker 1: You can follow me on Twitter at the Stalwork, follow

798
00:47:40,040 --> 00:47:44,080
Speaker 1: our producers Carmen Rodriguez at Carmen Armand and Dash Bennett

799
00:47:44,160 --> 00:47:46,719
Speaker 1: at dash Bot, and check out all of our podcasts

800
00:47:46,760 --> 00:47:50,719
Speaker 1: at Bloomberg onto the handle at podcasts, and for more

801
00:47:50,760 --> 00:47:53,839
Speaker 1: odd Lots content, go to bloomberg dot com slash odd Lots,

802
00:47:54,120 --> 00:47:56,560
Speaker 1: where we post transcripts. Tracy and I write a blog,

803
00:47:56,760 --> 00:47:59,040
Speaker 1: and we have a weekly newsletter that comes out every Friday.

804
00:47:59,120 --> 00:48:01,240
Speaker 1: Go there and sign thanks for listening.