WEBVTT - Steve Eisman on the 'Paradigm Shift' Happening in Markets Right Now 0:00:10.080 --> 0:00:13.400 Hello, and welcome to another episode of the All Thoughts Podcast. 0:00:13.480 --> 0:00:17.120 I'm Tracy Allowin and I'm Joe. Joe. It feels like 0:00:17.360 --> 0:00:21.680 an interesting moment in markets. Yes, I mean there's this 0:00:21.800 --> 0:00:25.000 sort of short term obvious stuff that's interesting, like oh, 0:00:25.120 --> 0:00:27.800 what's going to happen with the soft landing or what's 0:00:27.800 --> 0:00:31.280 gonna happen with the Fed, etcetera. But it also feels 0:00:31.320 --> 0:00:34.839 like a pretty big turning point in markets overall. Absolutely well. 0:00:34.880 --> 0:00:36.880 To me, it feels like kind of a massive flip 0:00:36.920 --> 0:00:41.879 flop from Doom and Gloom two, where it kind of 0:00:41.920 --> 0:00:44.040 felt like everyone was talking about the world was actually 0:00:44.120 --> 0:00:46.640 ending and suddenly, you know, fast forward to just the 0:00:46.680 --> 0:00:50.599 beginning of three, and everyone's talking about a soft landing, 0:00:50.720 --> 0:00:55.120 maybe the recession is averted. Markets are up quite remarkably, 0:00:55.200 --> 0:00:59.400 including things that got absolutely crushed last year. So some 0:00:59.480 --> 0:01:03.640 of the big stocks Bitcoin, I mean, some of the 0:01:03.720 --> 0:01:07.840 Chinese companies like real estate and consumer tech companies, all 0:01:07.840 --> 0:01:10.440 of those are surging, right, So like there's this hope 0:01:10.560 --> 0:01:13.319 right that we let's just go back to or let's 0:01:13.319 --> 0:01:16.040 just go back to one, like let's just hang on. 0:01:16.240 --> 0:01:18.119 And it's sort of this thing because you know, when 0:01:18.120 --> 0:01:21.720 I think of when I think of it was sort 0:01:21.760 --> 0:01:28.320 of like the ultimate speculative froth low interest rate environment. 0:01:28.600 --> 0:01:31.200 And as as everyone's tired of hearing me say, like 0:01:31.240 --> 0:01:33.960 on this podcast, like you know, I, you know, I 0:01:34.000 --> 0:01:36.360 first got interested in markets at the end of there 0:01:36.400 --> 0:01:39.039 it comes, folks. But I remember like those periods where 0:01:39.040 --> 0:01:41.040 it's like, you know, you have like you look at 0:01:41.040 --> 0:01:43.640 the NAS deck and two thousand and one or two 0:01:43.680 --> 0:01:46.120 thousand and you have like these fifty rallies. It's like 0:01:46.319 --> 0:01:49.160 we're back. I don't know, we're back. It's over. And 0:01:49.280 --> 0:01:53.000 that process of like I guess a bubble deflating is 0:01:53.040 --> 0:01:55.840 like a long process. People are slow to give it up. Well, 0:01:55.840 --> 0:01:58.360 that's exactly it, and it sort of happens in fits 0:01:58.400 --> 0:02:01.320 and starts. And I'm glad you meant shined the keywords there, 0:02:01.320 --> 0:02:05.160 which are bubble and you know, speculation, speculative interest, because 0:02:05.200 --> 0:02:07.720 today we are going to be talking to someone who 0:02:07.800 --> 0:02:11.359 is kind of an expert in exactly that and particularly 0:02:11.560 --> 0:02:15.360 one period of speculative financial history. We are going to 0:02:15.400 --> 0:02:18.760 be speaking with Steve Eisman. He has a portfolio manager 0:02:18.840 --> 0:02:22.880 at New Burger Berman, and he famously bet against subprime 0:02:22.919 --> 0:02:26.120 mortgages before the two thousand eight financial crisis. Of course, 0:02:26.160 --> 0:02:28.600 you might recognize him from the movie The Big Short. 0:02:28.680 --> 0:02:32.520 He was played by Steve Carrell. So really the perfect 0:02:32.560 --> 0:02:35.840 guest to talk about markets right now. Perfect, let's do it, 0:02:35.960 --> 0:02:37.880 all right, Steve, thank you so much for joining us, 0:02:37.919 --> 0:02:40.880 Thanks for having me. So where should we start. Maybe 0:02:41.320 --> 0:02:45.000 give us just your top line opinions on where markets 0:02:45.040 --> 0:02:48.720 are right now. Um, there's gonna be a long intro. Okay, 0:02:48.760 --> 0:02:53.519 that's fine. People are gonna look. So I remember back 0:02:53.520 --> 0:02:56.120 in college, one of the most influential books I read 0:02:56.400 --> 0:02:59.280 was a book by Thomas cune Cole, The Structure of 0:02:59.360 --> 0:03:05.400 Scientific Revolutions. He invented the modern meaning of the word paradigm, 0:03:05.520 --> 0:03:10.080 and the point of the book was that science paradigms 0:03:10.160 --> 0:03:14.760 change over time. Sometimes those paradigms changed violently, and sometimes 0:03:14.760 --> 0:03:18.520 those paradigms change over time because people don't give up 0:03:18.520 --> 0:03:21.760 their paradigms easily. And I think we're going through a 0:03:21.800 --> 0:03:25.800 period possibly like that again. So you know, markets have 0:03:27.440 --> 0:03:30.760 long periods of paradigms where there are certain groups that 0:03:30.800 --> 0:03:34.400 are leaders. So in the nineties, for example, it was 0:03:34.560 --> 0:03:41.560 largely i'd call it large conglomerates like ge was what 0:03:41.720 --> 0:03:44.400 people made money in and wanted to invest in. And 0:03:44.480 --> 0:03:47.640 it lasted about eight years until there was a small 0:03:47.760 --> 0:03:50.920 period of the dot com bubble, and obviously that ended 0:03:50.960 --> 0:03:54.520 and there was a recession, and after that, really through 0:03:54.640 --> 0:03:57.960 two thousand and seven, the new paradigm and just to 0:03:58.000 --> 0:04:01.240 take a step back, when you know what market paradigm shift, 0:04:01.280 --> 0:04:06.200 it's unusual that the old leaders become the new leaders. 0:04:06.240 --> 0:04:08.600 There's a shift, and there's there's a new leadership group. 0:04:08.600 --> 0:04:10.760 And you know, one of the most important leadership groups, 0:04:11.480 --> 0:04:13.680 i'd call it, from two thousand and two through the 0:04:13.760 --> 0:04:16.680 end of two thousand and seven were financials, you know, 0:04:16.760 --> 0:04:21.960 largely invests in banks, very large banks, where the opinion 0:04:22.000 --> 0:04:24.320 of the market was the people who ran these firms 0:04:24.320 --> 0:04:29.359 were basically geniuses until they weren't. And you know, we 0:04:29.400 --> 0:04:31.440 had a violent period in two thousand and eight and 0:04:31.480 --> 0:04:36.520 two thousand and nine where those stocks got crushed. Almost 0:04:36.520 --> 0:04:38.880 all of them would have gone bankrupt unless the government 0:04:38.880 --> 0:04:43.080 bailed them out, which it did. But you know, financial 0:04:43.120 --> 0:04:47.719 stocks that did well in the two thousand's did literally 0:04:47.920 --> 0:04:52.719 nothing until probably two thousand and twenty, So call it 0:04:52.760 --> 0:04:58.720 a dozen years where the old leadership group evaporated and 0:04:58.760 --> 0:05:01.880 it was replaced by new leadership group, and that leadership 0:05:01.920 --> 0:05:04.760 group was tech and growth stocks. And I think the 0:05:04.760 --> 0:05:07.320 reason for that is that the FED cut rates essentially 0:05:07.360 --> 0:05:09.600 to zero and kept them there and so you were 0:05:09.680 --> 0:05:13.080 essentially paid to take risk. And as we all know, 0:05:13.160 --> 0:05:16.159 there's a discounting mechanism of stocks where you know, you 0:05:16.200 --> 0:05:19.520 plot out the earnings and the lower the discount rate, 0:05:20.120 --> 0:05:22.919 the more the stock is worth. So the groups that 0:05:22.960 --> 0:05:25.400 the group that did best were growth tech stocks, and 0:05:25.440 --> 0:05:27.880 within growth tech stocks, the group that did the best 0:05:27.920 --> 0:05:31.560 were the high growth no earning stocks, and that left 0:05:31.600 --> 0:05:35.960 that basically lasted until last year. And if you look, 0:05:36.040 --> 0:05:38.880 you know it was a bad market last year. But 0:05:39.800 --> 0:05:43.839 the stocks that did the worst were the growth tech stocks. 0:05:43.880 --> 0:05:46.880 And within the growth test tech stocks, the stocks that 0:05:46.920 --> 0:05:49.679 did the worst were the high growth no earning stocks, 0:05:49.760 --> 0:05:53.800 down generally anywhere from seventy to you know, it's a 0:05:53.800 --> 0:05:56.880 crushing percentage, but like I said, you know, people don't 0:05:56.880 --> 0:05:59.800 give up paradigms easily. And so so far this year, 0:05:59.880 --> 0:06:03.440 the stocks have that have done best were the same 0:06:03.480 --> 0:06:06.800 socks that did the worst. And you know, if you 0:06:06.880 --> 0:06:10.440 go back to two thousand and nine through early two 0:06:10.480 --> 0:06:14.680 thousand and ten, financial stocks had their last hurrah, you know, 0:06:14.760 --> 0:06:17.560 Goldman Morgan Stanley had said it did very very well 0:06:18.120 --> 0:06:21.520 until you know, Dodd Frank was passed and they had 0:06:21.560 --> 0:06:23.960 to deliver, so they had kind of had a last hurror. 0:06:23.960 --> 0:06:26.200 And maybe this is the last hurrah right now for 0:06:26.360 --> 0:06:30.599 growth stocks. Possibly, And I think it'll all depend pretty 0:06:30.680 --> 0:06:34.240 much on the FED. You know, Powell has said that 0:06:34.279 --> 0:06:38.119 he's going to keep raising rates and the important sentences 0:06:38.520 --> 0:06:42.040 and he'll leave them there. If he leaves them there, 0:06:42.160 --> 0:06:45.000 I think we'll have a paradigm shift. If he cuts 0:06:45.040 --> 0:06:47.320 it again, we'll go back to what we were, which 0:06:47.360 --> 0:06:49.560 is growth stocks. I mean, I think he's going to 0:06:49.680 --> 0:06:51.679 leave him there and then we'll have a paradigm shift. 0:06:51.760 --> 0:06:55.120 But it's unknowable at this point, you know. Like I said, 0:06:55.120 --> 0:06:58.279 paradigm shift can be very violent. They take time. I 0:06:58.320 --> 0:07:00.159 think we're in the middle of that right now. And 0:07:00.200 --> 0:07:04.520 like I said, it's unusual when you shift to new 0:07:04.560 --> 0:07:07.279 paradigm that the old leaders become the new leaders. What 0:07:07.400 --> 0:07:10.480 the new leaders will be assuming this happens at this point, 0:07:10.520 --> 0:07:13.520 I don't really know, you know, Joe, I'm looking at 0:07:13.560 --> 0:07:16.920 the Bubble portfolio, which was created by another all thoughts 0:07:16.920 --> 0:07:19.480 guest Paul McNamara and basically has a lot of the 0:07:19.520 --> 0:07:23.400 stocks that Steve was just talking about up so far 0:07:23.480 --> 0:07:26.920 this year. Tracy was created by Paul and me. Oh, 0:07:26.960 --> 0:07:30.120 I'm sorry, I co I co created. I'm so sorry. 0:07:30.440 --> 0:07:33.040 Port By the way, some of those stocks are up. 0:07:35.120 --> 0:07:38.600 It's pretty it's astonishing now they're up fifty from very 0:07:38.640 --> 0:07:41.480 low levels. You know. Take I'm not picking on them. 0:07:41.520 --> 0:07:44.800 Take a stock like a firm which is a buy now, 0:07:44.920 --> 0:07:47.760 pay later company, really a financial company. I think it's 0:07:47.880 --> 0:07:51.760 up sixty sent this year, but it's up sixty percent 0:07:51.880 --> 0:07:56.520 this year after being down basically, so I think it 0:07:56.760 --> 0:08:00.320 closed last year around eight and it's it's fifty, but 0:08:00.360 --> 0:08:03.120 it used to be I don't remember a hundred, two hundred, 0:08:03.160 --> 0:08:05.520 whatever it was. Yeah. Another one of these ones that 0:08:05.560 --> 0:08:08.640 I've been watching is an open Door, which got below 0:08:08.680 --> 0:08:11.720 a dollar at the end of December. Now so like 0:08:11.760 --> 0:08:14.040 more than a double, but that was like a twelve dollar. 0:08:14.320 --> 0:08:18.400 That was a spack, I mean, so it's incredible beat down. 0:08:18.440 --> 0:08:21.560 And then this sort of about what is that process? 0:08:22.120 --> 0:08:24.040 You know, you talk about this sort of like the 0:08:24.160 --> 0:08:26.840 giving up the dreams and the process by which people 0:08:26.840 --> 0:08:28.760 aren't sure it's it over? Is it not over? We 0:08:28.800 --> 0:08:31.200 don't want to change the paradigm, just in the sort 0:08:31.240 --> 0:08:32.880 of like how do you talk a little bit more 0:08:32.920 --> 0:08:36.920 about like how that happens? What that how that process works? Well, 0:08:36.960 --> 0:08:39.640 it takes time, you know. I would recommend everybody read 0:08:39.679 --> 0:08:43.120 this Thomas qun book. It was published the year I 0:08:43.160 --> 0:08:46.480 was born nineteen sixty two, which is I guess revelatory 0:08:46.600 --> 0:08:51.560 for me. But but what he describes is, like I said, 0:08:51.600 --> 0:08:57.040 people don't give up their paradigms easily. When when Einstein 0:08:57.120 --> 0:08:59.480 created his theory of relativity, for example, this is in 0:08:59.520 --> 0:09:01.240 the book, is out like everybody said, Oh we've been 0:09:01.240 --> 0:09:04.320 waiting for Einstein. Thank god, now we can get rid 0:09:04.360 --> 0:09:07.880 of Newton. You know, people, it took several years for 0:09:08.000 --> 0:09:11.240 people to realize that that was a better theory. I 0:09:11.280 --> 0:09:14.880 think something like that happens in markets. You know. Paradigms 0:09:15.880 --> 0:09:20.640 in essence are so deeply ingrained in people's brains they 0:09:20.640 --> 0:09:24.560 can't even imagine at times that there could be anything else. 0:09:25.400 --> 0:09:27.920 And so, like I said, since paradigms, people don't give 0:09:28.000 --> 0:09:31.000 up their paradigms easily. The only thing that gets people 0:09:31.000 --> 0:09:34.720 to give them up is time. Now, the financial stocks 0:09:36.440 --> 0:09:42.480 that was quick because they utterly collapsed. But that's unusual. 0:09:42.600 --> 0:09:45.200 It's not like it's not like in the nineties the 0:09:45.360 --> 0:09:50.240 conglomerates collapse. They didn't collapse. Their earnings growth slowed, and 0:09:50.400 --> 0:09:53.640 you know, people expected the earnings growth to re accelerate 0:09:53.679 --> 0:09:56.760 and it didn't. So, you know, take Ge. You know, 0:09:56.840 --> 0:10:00.199 Ge was a star for almost all the nine d 0:10:00.400 --> 0:10:03.560 s and then when Emil took over just before nine eleven, 0:10:04.240 --> 0:10:07.080 it's deteriorated. You know, one of probably one of the 0:10:07.080 --> 0:10:10.520 best trades in the world would have been owning Amazon 0:10:10.679 --> 0:10:15.320 and shorting g Right. You know, it's funny, Tracy, I 0:10:15.400 --> 0:10:17.360 actually went I mentioned open Door. I got it kind 0:10:17.360 --> 0:10:18.640 of wrong. I said it was at twelve and it 0:10:18.760 --> 0:10:20.920 was a thirty five dollar stock that went to a dollar. 0:10:21.040 --> 0:10:23.680 So I was sort of understating the scale of the collapse. 0:10:24.280 --> 0:10:27.720 But more importantly, let's talk about open Doors. Let's get 0:10:27.800 --> 0:10:30.480 right into it. So open Door had a business model 0:10:31.320 --> 0:10:38.080 where they would buy homes, fix them up, and try 0:10:38.120 --> 0:10:42.120 to sell them quickly. Now, when you think about it, 0:10:42.600 --> 0:10:46.400 that business model only works if housing prices are going up. 0:10:47.000 --> 0:10:51.079 If housing prices are going down, it's a disaster. Um. 0:10:51.120 --> 0:10:53.720 So I never thought it was a real business model. 0:10:53.880 --> 0:10:56.920 It was a timing model. And I think the reason 0:10:56.960 --> 0:10:59.600 why the stock got crushed last year is because, I mean, 0:10:59.600 --> 0:11:03.400 housing hasn't collapsed in the United States, but it's kind 0:11:03.400 --> 0:11:07.360 of locked and housing prices have gone down, so it's 0:11:07.360 --> 0:11:10.360 hard to sell and be you're selling for less, and 0:11:10.400 --> 0:11:12.720 that's why Open Doors down so much. But you know 0:11:12.760 --> 0:11:14.280 what it came out. It was another one of these 0:11:14.320 --> 0:11:18.440 speculative going to conquer the world stocks until it wasn't. 0:11:35.800 --> 0:11:38.120 I definitely want to talk more to you about housing 0:11:38.160 --> 0:11:40.320 and real estate in a second, but just on the 0:11:40.360 --> 0:11:42.800 paradigm shift. You know, when I think about the paradigm 0:11:42.840 --> 0:11:45.560 of the past couple of years, you mentioned low interest 0:11:45.640 --> 0:11:48.960 rates and that helping to boost valuations, but I also 0:11:49.000 --> 0:11:52.640 think about momentum and people just identifying the thing that 0:11:52.679 --> 0:11:55.800 they think other people are going to buy and then 0:11:55.880 --> 0:11:58.920 pouring into that and so having a lot of valuations 0:11:59.040 --> 0:12:02.600 driven by flows. Can you talk about that behavior in 0:12:02.640 --> 0:12:06.440 the market. I call this what I call it this 0:12:06.720 --> 0:12:10.840 the Amazon disease. I'm not saying Amazon is a bad company. 0:12:10.880 --> 0:12:13.880 It's a great company. What I mean by the Amazon diseases, 0:12:14.840 --> 0:12:17.959 you know, and when Amazon came public, there was a 0:12:18.040 --> 0:12:21.720 lot of skepticism that this work. And Amazon has basically 0:12:21.800 --> 0:12:25.280 conquered the world, and so people are always looking for 0:12:25.360 --> 0:12:28.960 the next Amazon. And you know that they're looking for 0:12:29.000 --> 0:12:31.839 the next Amazon when they just when they write when 0:12:32.080 --> 0:12:34.960 when the cell side writes a research report and the 0:12:35.000 --> 0:12:40.040 first sentences the TAM is huge, which means the total 0:12:40.080 --> 0:12:45.360 available market is huge. Well, you know, take open door again. 0:12:46.120 --> 0:12:50.079 Housing is huge. I mean, there's no question that housing 0:12:50.160 --> 0:12:53.679 is huge. But that doesn't mean people's business models are 0:12:53.679 --> 0:12:57.080 going to conquer housing. But people are constantly you know, again, 0:12:57.360 --> 0:13:00.640 when rates or zero, you're paid to speculate. So you 0:13:00.679 --> 0:13:03.200 look at open door and you say, well, the housing 0:13:03.240 --> 0:13:05.439 market in the United States is I don't know, a 0:13:05.440 --> 0:13:08.280 trillion to whatever, it is a trillion to trillion. If 0:13:08.360 --> 0:13:12.200 open Door only gets one cent of that market, the 0:13:12.240 --> 0:13:17.280 stock is huge. And as long as revenue growth is strong, 0:13:18.840 --> 0:13:22.120 people are willing to make that bet. When revenue growth 0:13:22.120 --> 0:13:25.120 starts to slow, they they get they don't think about 0:13:25.160 --> 0:13:27.760 the TAM anymore. They start to think about the business model. 0:13:27.880 --> 0:13:33.840 So you know, in two thousand and ten through tooth 0:13:34.160 --> 0:13:36.520 beginning of two thousand and twenty two, if you were 0:13:36.559 --> 0:13:40.960 a company that had no earnings that strong revenue growth, 0:13:41.160 --> 0:13:45.600 people dream the dream. When the revenue grow slows, people 0:13:45.640 --> 0:13:50.480 stopped dreaming the dream. Or combination of that with higher 0:13:50.559 --> 0:13:53.880 rates and the discounting mechanism takes down the stock. You know, 0:13:53.920 --> 0:13:56.640 even companies that did well last you went down because 0:13:56.640 --> 0:14:00.760 of the discounting mechanism. So let's say we are at 0:14:00.800 --> 0:14:03.679 this paradigm shift and we don't know what it's gonna be. 0:14:03.720 --> 0:14:07.000 We don't know what it's gonna look like, but something 0:14:07.040 --> 0:14:10.720 that's not speculative tech will be the new leadership, presumably 0:14:10.960 --> 0:14:14.760 for a while. As an investor, like, do you feel 0:14:14.800 --> 0:14:17.160 like you can wait and sort of see what it 0:14:17.240 --> 0:14:19.520 is and like let the market kind of decide, or 0:14:19.520 --> 0:14:22.080 do you feel like an impulse to try to anticipate 0:14:22.520 --> 0:14:26.640 today what that thing. I think you anticipate a little bit, 0:14:27.040 --> 0:14:29.200 you know. So, for example, I think one of the 0:14:29.200 --> 0:14:33.280 themes for the next several year is what I would 0:14:33.280 --> 0:14:37.520 call the ressoring of the industrial world back into the 0:14:37.560 --> 0:14:41.920 United States. So, you know, for the last call it 0:14:42.080 --> 0:14:47.040 thirty years, companies have essentially sent their supply lines out 0:14:47.080 --> 0:14:49.280 to the inside the United States because labor in the 0:14:49.360 --> 0:14:52.720 United States is expensive and labor in China and Vietnam 0:14:53.040 --> 0:14:56.840 is cheap, and that worked for a very long time, 0:14:57.120 --> 0:15:03.800 and it was very deflationary. And COVID proved one thing. Yes, 0:15:03.840 --> 0:15:08.320 that supply chain is less expensive, but it's also very brittle. 0:15:09.240 --> 0:15:13.560 And because of what happened during COVID, people are companies 0:15:13.560 --> 0:15:16.480 are bringing back the supply chain, at least partially back 0:15:16.520 --> 0:15:20.040 to the United States. So, you know, stocks that haven't 0:15:20.200 --> 0:15:25.600 done anything in twenty years, let's say, might start to 0:15:25.640 --> 0:15:30.200 do well, like b HP, iron ore, etcetera. That's one 0:15:30.280 --> 0:15:33.920 theme that I think will last a long time. Greenisfication 0:15:34.040 --> 0:15:36.720 I think will last a long time. Although some of 0:15:36.720 --> 0:15:40.640 those stocks have no earnings and high revenue growth, I 0:15:40.680 --> 0:15:42.960 never quite know what to make of them. But there 0:15:42.960 --> 0:15:45.640 are other ways to play the same theme. You know, 0:15:45.880 --> 0:15:49.040 their companies I won't mention any names, but their companies 0:15:49.080 --> 0:15:53.520 that are that are well, let's call them normal, that 0:15:54.080 --> 0:15:57.120 are helping rebuild the infrastructure of the United States and 0:15:57.160 --> 0:16:00.440 the electrification of the United States, etcetera. So those are 0:16:00.480 --> 0:16:03.560 things you could start to look at. So that's actually 0:16:03.560 --> 0:16:05.600 something that we've spoken quite a lot about on all 0:16:05.680 --> 0:16:08.240 lots of this idea of a sort of shift from 0:16:08.280 --> 0:16:15.440 I guess ephemerate tech software to the reality of actual things. 0:16:16.000 --> 0:16:17.600 This might be a slightly weird question, but do you 0:16:17.600 --> 0:16:23.280 think investors are well positioned or well informed to grasp 0:16:23.440 --> 0:16:26.320 that shift, because I imagine there must be a fundamental 0:16:26.320 --> 0:16:30.400 difference between looking at a tech company versus say, I 0:16:30.480 --> 0:16:33.400 don't know, in an oil major or something like that. Oh, 0:16:33.440 --> 0:16:35.720 I don't think people are prepared yet. You know, they've 0:16:35.720 --> 0:16:39.320 owned tech stocks for so long. You know, they look 0:16:39.360 --> 0:16:42.440 at revenue growth, they look at e v D. But uh, 0:16:43.440 --> 0:16:45.640 you know, one of the things that I find astonishing, 0:16:45.680 --> 0:16:49.080 for example, about tech stocks is they don't include stock 0:16:49.120 --> 0:16:53.160 based compensation and earnings, which I just find a little weird. 0:16:53.960 --> 0:16:59.080 And because I would always ask, do you deduct stock 0:16:59.120 --> 0:17:02.840 based competence? Stock based come from your taxes? And the 0:17:02.920 --> 0:17:05.639 ends to that is always yeah, So in that sense 0:17:05.680 --> 0:17:08.520 it's real, but when the report earnings, they pretend it's 0:17:08.560 --> 0:17:11.879 not real. But the market doesn't seem to care. But 0:17:12.040 --> 0:17:15.600 I think it's going to take time, you know, like I, 0:17:15.840 --> 0:17:18.159 like I always talked about before some of these very 0:17:18.200 --> 0:17:22.640 speculative stocks are up this year, it's going to take 0:17:22.640 --> 0:17:25.040 time for people to start to do I think research 0:17:25.119 --> 0:17:29.200 on other stuff. I know you weren't investing yet at 0:17:29.240 --> 0:17:32.879 this point. But you know, as a student of market history, 0:17:33.080 --> 0:17:35.840 was there the same process like with the like earlier 0:17:35.880 --> 0:17:38.880 tech bubbles, like in the sixties, with the aerospace stocks 0:17:38.920 --> 0:17:41.600 and some of those other waves. I mean, I was 0:17:41.640 --> 0:17:43.280 in great school, and that's what I'm saying. No, I 0:17:43.280 --> 0:17:45.119 figured out. But I although the two of you, I 0:17:45.119 --> 0:17:48.639 don't think we're alive back then. Um. You know, I 0:17:48.640 --> 0:17:51.800 think if you look at economic history, probably it's true. 0:17:51.880 --> 0:17:54.280 I haven't really looked at that much. But you know, 0:17:54.359 --> 0:17:57.600 in the in the late seventies, the group that people 0:17:57.640 --> 0:18:01.640 wanted to own work whil stocks. Oil stocks haven't done 0:18:01.680 --> 0:18:05.520 well for god knows how many years until basically the 0:18:05.600 --> 0:18:09.520 last two Now let's talk about old stocks for a second. 0:18:09.880 --> 0:18:12.440 You know, pipeline stocks, oil stocks. You know, why did 0:18:12.440 --> 0:18:15.800 they do so poorly? This is not a paradigm shift. 0:18:15.840 --> 0:18:19.560 This is a shareholder's revolt issue. So you know, if 0:18:19.560 --> 0:18:22.440 you look back, call it two thousand and ten through 0:18:22.720 --> 0:18:26.320 maybe two thousand eighteen or so. And this is where 0:18:26.480 --> 0:18:32.760 I would say incentives trump ethics every time. So the 0:18:32.840 --> 0:18:35.800 people who ran these companies where it was the midstream 0:18:35.840 --> 0:18:41.240 pipelines or the drillers the c e O s of 0:18:41.280 --> 0:18:46.159 those companies were all compensated essentially on volume, so it 0:18:46.200 --> 0:18:49.280 didn't matter whether the oil prices with thirty or they're 0:18:49.280 --> 0:18:53.399 all prices were eighty. They kept growing their production and 0:18:53.400 --> 0:18:56.160 in most cases they basically never made money whether oil 0:18:56.240 --> 0:18:59.600 prices with thirty or prices were eighty. And at some 0:18:59.760 --> 0:19:03.199 poll point, probably around two thousand and sixteen, when the 0:19:03.240 --> 0:19:07.399 group got crushed, I think that the shareholders literally revolted 0:19:07.880 --> 0:19:11.119 and they went to these managements and said enough and 0:19:11.160 --> 0:19:14.159 you have to change your compensation to R O E, etcetera. 0:19:14.960 --> 0:19:17.640 And the stocks have done pretty well since that, especially 0:19:17.680 --> 0:19:21.359 in the last two years, because the way they operate 0:19:21.440 --> 0:19:25.320 now is they basically planned their business models for oil 0:19:25.359 --> 0:19:28.680 prices as something like fifty to sixty, and if oil 0:19:28.720 --> 0:19:33.240 prices are above they return the money to shareholders, which 0:19:33.280 --> 0:19:35.560 is one of the reasons why despite the fact that 0:19:35.600 --> 0:19:40.080 all prices were so high last year, those same companies 0:19:40.080 --> 0:19:42.760 did not increase their production that much. Now, some people 0:19:42.760 --> 0:19:45.960 accused the Biden administration of this. I don't think it 0:19:46.000 --> 0:19:48.399 has anything to do with the Biden administration. Has to 0:19:48.440 --> 0:19:52.240 do with the change and incentive structure for these companies. 0:19:52.600 --> 0:19:55.760 Incentives trumping ethics is such a good line and I'm 0:19:55.840 --> 0:19:58.520 definitely going to steal it from you at some point, Steve, 0:19:58.720 --> 0:20:00.560 you can play giarize. You don't even a the quotemak. 0:20:00.920 --> 0:20:03.399 Thank you. I think I appreciate that, um I have 0:20:03.440 --> 0:20:06.840 a full license on that line. You know, given your background, 0:20:06.920 --> 0:20:08.919 I think we would be remissed to not talk a 0:20:08.960 --> 0:20:12.600 little bit about financial risk and financial stability. And this 0:20:12.640 --> 0:20:14.640 is something that has come up over the past year 0:20:14.840 --> 0:20:18.359 with the FED raising interest rates so rapidly, and yet 0:20:18.440 --> 0:20:25.040 we haven't actually seen a significant break Is the system fixed? 0:20:25.280 --> 0:20:28.399 Is it just not going to come that big breakage 0:20:28.440 --> 0:20:31.520 that you know some people have been anticipating for a while. Well, 0:20:31.560 --> 0:20:34.280 I can't say that they won't be breakage any anywhere 0:20:34.320 --> 0:20:38.280 that I mean, there always could be breakage. What I 0:20:38.320 --> 0:20:42.280 would say definitively is that there will not be breakage 0:20:42.280 --> 0:20:46.040 in the US financial system, especially in the banks. We 0:20:46.080 --> 0:20:51.960 can owe that to one person, which is Daniel Tarullo, 0:20:52.119 --> 0:20:55.720 who was the first Vice Chairman in charge of Financial 0:20:55.760 --> 0:20:58.479 Supervision at the FED, which was a position that was 0:20:58.600 --> 0:21:03.480 created only from Dodd Frank and he was given the job. 0:21:03.520 --> 0:21:06.600 Although it's funny he was never actually officially appointed to 0:21:06.640 --> 0:21:09.320 the job, because you know, it makes it. He'd have 0:21:09.359 --> 0:21:11.359 to testify in front of the Senate. It would have 0:21:11.400 --> 0:21:15.800 been difficult, but he he was essentially given the job anyway, 0:21:15.920 --> 0:21:20.920 and he really took the banks. He was very harsh 0:21:21.200 --> 0:21:24.200 what he did to them. The banks objected to literally 0:21:24.280 --> 0:21:28.560 kicking and screaming, but today they probably all thank him. 0:21:28.760 --> 0:21:32.160 There are two things that he did. He reduced leverage 0:21:32.200 --> 0:21:36.560 in the banks enormously, and even within that leverage, he 0:21:36.960 --> 0:21:41.439 made them cut off the tails of risk. So, just 0:21:41.520 --> 0:21:46.800 to give you an example, City Group before the crisis, 0:21:46.920 --> 0:21:50.240 if you included all the off balance sheets stuff that 0:21:50.320 --> 0:21:54.800 eventually came back on balance sheet, it was probably levered 0:21:55.240 --> 0:21:58.840 anywhere from thirty five to forty to one, and by 0:21:58.840 --> 0:22:03.240 the time he was on it was lever tent to one. Now, 0:22:03.400 --> 0:22:08.080 for listeners, that may not mean that much. You know, 0:22:08.640 --> 0:22:11.040 forty to ten, you know, those are just numbers. But 0:22:11.200 --> 0:22:15.720 the way I would describe it is, when you're levered 0:22:15.840 --> 0:22:19.199 forty to one, to destroy the bank, you need a pebble, 0:22:19.920 --> 0:22:22.760 but when the bank is levered ten to one, you 0:22:22.840 --> 0:22:28.800 need a meteor. So now we could have worst credit 0:22:28.960 --> 0:22:31.600 in the United States, Although that really hasn't happened yet, 0:22:31.840 --> 0:22:37.359 So under those circumstances, the banks would earn less. But 0:22:37.520 --> 0:22:41.919 I would say other than a couple of banks, not 0:22:42.040 --> 0:22:44.879 one bank in the United States will lose money. M hm. 0:22:45.520 --> 0:22:47.360 I seem to remember, weren't you one of the few 0:22:47.400 --> 0:22:50.480 people that read all of Dodd Frank from like front 0:22:50.520 --> 0:22:52.920 to back. I think it was two thousand pages? Or well, 0:22:53.440 --> 0:22:59.040 that's not true, that's a myth. Okay, So you're talking 0:22:59.040 --> 0:23:02.480 about finding controls stability, but you know, we also touched 0:23:02.480 --> 0:23:05.080 on real estate earlier, and again, you know, you you 0:23:05.200 --> 0:23:08.199 sort of characterized the housing market it's kind of in 0:23:08.200 --> 0:23:11.679 a freeze. Maybe it's already stabilized a little bit, but 0:23:11.800 --> 0:23:14.000 with rage having shot up so much, I mean, like, 0:23:14.080 --> 0:23:16.720 how are you thinking about like housing and where it's 0:23:16.720 --> 0:23:19.880 going to go? And can like, can it stabilize with 0:23:20.000 --> 0:23:23.440 such a repricing of mortgages in a short period of time? Um? 0:23:23.480 --> 0:23:26.600 I mean sure it can reprice, it takes time. I 0:23:26.640 --> 0:23:30.119 did a small calculation when mortgage rates got to seven, 0:23:31.119 --> 0:23:35.200 which was if you calculated the monthly payment of someone 0:23:35.240 --> 0:23:39.200 who bought a home with a three percent mortgage versus 0:23:39.240 --> 0:23:41.960 someone who wants to buy the same home at the 0:23:42.000 --> 0:23:47.080 same price with the same mortgage at seven percent. For 0:23:47.200 --> 0:23:50.199 that person to have the same monthly payment as the 0:23:50.280 --> 0:23:53.080 person with a three percent mortgage, the price of the 0:23:53.119 --> 0:23:58.560 house has to go down from now. As long as 0:23:58.600 --> 0:24:02.160 people are employed, they're not going to sell their home down. 0:24:03.240 --> 0:24:07.040 They'll just live in their home. So housing prices have 0:24:07.200 --> 0:24:10.920