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