No Signs of Late Cycle Behavior, Eisman Says

Bloomberg dot Com, and of course, on the Bloomberg. I'm very pleased to say that we can welcome in New York in our studio Steve Eisman, famous of course for his successful bet against subprime mortgages, featured in a book you will know well, Michael Lewis's book The Big Short, and now a portfolio manager at new Berger Berman Group. Steve. Good morning to you, sir, and thank you very much for joining us. Glad to be here. I was looking at your Oxford Union appearance, which I'm sure was an honor,

and I want to start with that. And the quote is a follows. If you had gone and said to executives pre crisis, the entire paradigm of your career is wrong. The response was, listen, kid, I made fifty million dollars last year. What did you make? What's different between now and then? There's a lot there's a lot different. Um, you know, I would say that the the gestalt. If I could use that word on Bloomberg of the regular

Tory world crisis, I think you can say that. Can you can say that right pre crisis was we trust you by the regulators, and so essentially we had in a world that had the trappings of regulation, but in reality we had a completely deregulated financial services sector. And today the difference is that the industry is extremely heavily regulated, and even though there's it's going to be a major change in the Trump administration, is still gonna be a

very heavily regulated industry. Something you've said is that leverage made people look like they were gene assists. Yes, is that happening now? Um, it's too early. Um, you're going to see leverage go up and returns are going to go up, and so firms are going to feel better and they'll think they're they'll they'll think they're a lot smarter. But it's you know, it's just math. You know, the more leverage you can put on, the more the higher are we well, Steve, it raises the question you say

it's too early. A lot of people trying to work out where the cycle we actually are. Do you see any signs of like cycle behavior. No, they don't. I really don't. I look for them every day. Credit quality is still superior. In fact, some areas that people were concerned about, like me, they've gotten better. You know sometime, auto credit quality seems to have started to get a little bit better. Credit card industry, which saw some higher delinquencies and higher losses. I think those are going to

start to go down. So are The answer that question is now, how forensic have you been at the moment, Steve? I mean, many people know you as the person that really undressed and stripped back these collateralized dead obligations and looked at how messy some of these individual things actually were. Are you getting that forensic at the moment? Are you still that forensic in your day to day work. I'm always forensic. You go through securitization data every single month.

That's that's kind of like my bible. And there's just no signs of stress there are. So when people talk about the books for subprime autos and they're saying the debt loads are piling up there, there's something to worry about. His students that could say whatever they want, But we'll come to student loans in a second, please, you know, with respect to everything else other than the student loans, the credit data is excellent. Steve Iceman with us on

what is going up? Talk about a vector from the lower left of the upper right student loans. How do you get forensic on student loans? Um? Well, let's make something very clear. The student loan problem is not a financial services sector problem. It's not a systemic problem the United States government problem. Most of all student loans and United States are government gar inteed, So you know, whatever problems show up, that's a taxpayer problem. That is a problem.

It's going to be dispersed throughout the US economy. But it is not a financial system systemic issue. Is it a problem for the next generation stave or is it a problem we need to get ready to deal with imminently? Um, It's a problem that exists right now, you know. Um. I it's terrible that people graduate from college and grad school with as much dead as they have. It affects the housing market to a certainly a significant degree. It

affects people for the rest of their lives. I think the current system of the way we finance higher education is appalling. How would you change it? Well, that's a long story. I look, I make I think there's we need to make community colleges, if not free, at least heavily subsidized by the government. A lot of state universities should be much more heavily subsidized. I mean, what people

pay for education is it is ridiculous. I have to I have twin girls who are in school right now that what it costs to go to university is insane. Within that is within the debate on education and financing is also education is the underpinning for the future of America that has to fold into investment. Are the kids today, the people you know, I'm gonna say thirty five and under where they've really not known anything except post crisis

nominal rates and such. Are they as educated about volatility? Is they should? Absolutely not. There's an entire generation of people who now work on Wall Street who have no idea what volatility is. How do we teach it to them? Just experience enjoying school? The hard knocks, Well, it's it's called watching the bid walk away. And we don't really haven't seen that in a while now, we have not. We haven't seen that in a very very long time.

Do you see any opportunities in the equity market. Did you stay un far more fixed on fixed income and debt instruments, So I don't do anything in fixed income. I don't see I don't see much of opportunities and fixed income until it rates going up. I think all the opportunities are in the equity markets. Long and short. Okay, what do you want? Give us some categories of lawns right now that you find attractive. Does that fold over

to banks? The biggest capital allocation is financials, mostly banks. My second largest capital allocation is tech. UM and my shorts are well. We could talk about well. I imagine most people that's the first thing they asked you, Steve, what are you sure? Well my shorts? I mean, I've in public about this. Um the only bank that I'm short as well as Fargo give me the wine. UM. I think Wells Fargo is going obviously is going through

a torrential change in its culture. You know, Wells Fargo historically has been a bank that out earns on an are we and r away basis other banks, and given the regulatory environment for Wells Fargo, the change in the culture, UM, Wells Fargo is just going to come a normal bank in terms of its profitability. A normal bank perform one in this environment, though, and when it can't grow. Interesting,

and that they are not allowed to grow. And you know, the CEO, after the FED capped them two weeks ago, got on on a conference call and said this was only going to impact their earnings by about two to four. I don't know how he could have said that, because no, no bank that I know of has had the regulators capped their assets when the bank is healthy. So it's impossible to know what that's going to mean. But Steve,

let me be clear here. Did you put the short on before the Federal Reserve made that move or afterwards? I put the short on last summer interesting, very very early on, then well after the scandal had obviously broken, but before the regulators really did anything. Let's do this. Someone's either calling. It's either Sunderland calling John Ferrell, probably my wife, it's one of your kids. I think it's my wife. It's her, it's her tone, that's her tone,

Mrs Eisman. He'll be with you in a moment, Steve Eisman with us, and we will continue thrilled it. All of you of Global Wall Street are listening this morning to Mr Jerome Snyder with a snow up pim Coast with a short term paper. By short we mean short. I want you to explain to the retail audience why pros look at one year, six months and three months of paper. Well, quite honestly, you know, when you look at the front end of the tebow curve, a couple

of things have happened. We've had over five billion dollars of new tebill supply come onto the market uh two or fifty billion over the past month alone, uh in in this year projected, which is a profound amount just simply because we have to absorb it. Well, why why is that important? Was there a problem? And absorber again? Well, there's actually has been actually a dearth of paper in that short term space and as a result, front end

yields have been anemic for many years. So one of the profound things, Tom, is that, you know, we finally have the one year T bill rate above two percent. So it's actually pretty interesting. The entire flat, entire curve, as we all point to the two Stens curve, as you know, move from you know, a hundred basis points to eighty basis points to the low low forties or mid forties too, back about sixty basis points. That's one

aspect of it. But just recognize the fact that front in yields have actually increased, and that flatness has actually allowed some sabers at least in part, to participate in that upward drift of yields and to incorporate them. So T bills, short term bond funds, things like that that can really adapt to uh, the higher yields and embrace them have actually been beneficiaries of this rising rate environment.

So I just want to frame what's happening in the United States for America at the moment, because I think it's really important for savers at the moment. Deposit baits and the jargon incredibly love. What that basically means is that the federal reserve interest rates are going up and

the banks aren't pace passing it onto that deposit base. Now, I'm trying to understand why everyone doesn't know about the fact that one month TA bills and now one and a half percent, and why we haven't got this flood of deposits coming from these banks into tabills. Why isn't that happening, Why aren't people waking up to the fact that you can now get one and a half percent in a one month TA bill when you are getting

basis points. What was your bank account? Well, what was the last time a bank said to you, Hey, I actually wanted They're not going to right, So let's just put the logic behind this. Banks don't necessarily want to pay more for deposits than they want to. Similarly, there's been structural changes over the past few years. We've seen a restounding response to money market fund reform, a story that's more than five years old. Happened in two thousand

and sixteen. But as rates have increased during this rate hiking cycle, yields and money market funds have remained rather anemic. Mean, they haven't recalibrated as high as benchmark rates. Still, the average money market fund yields about one point three percent after fees, which is pretty small. Deposits at the same time, while they've beta has actually increased slightly, hasn't as increased to the point that we've seen in previous rate hiking cycles.

So long story short is, savers are earning a little bit more than they woul did probably a year or two ago, but not much more so. The key to success in capital preservation, the key to success in earning income, and the key to success in avoiding volatility in overall portfolios is finding ways that can adapt and embrace to earn those higher yields. One year tebows are one way

to do it. Still fairly conservative in that regard, but we can actually look to points of the yield curve in the front end the zero to two year space specifically, and zero to two your corporates which are relatively safe offer yields of about two point five to three percent in some cases and have benefited actually from a structural widening that we've seen in spreads over the past four

weeks or so. So I'm gonna pull a page from the two thousand eight playbooks, so if you will so, libral o I s the library versus the spread of overnight index swaps, which is rebo effectively are are five funds rate effectively has moved from basically ten basis points at the end of last year that spread to about forty basis points. In two thousand and eight would have been saying, holy cow, this is a systemic event. Let's pay attention to it. Now, we're actually saying there's really

no systemic issue here. We would have heard about it from Jerome Pale, who loves to talk about regulation and systemic issues. But the reality is is that that's not necessarily the case right now. So it's an opportunity. So we we actually published a blog piece yesterday on pimco

dot com two applies to this point. But it's really recognized that this is an opportunity to embrace these higher yields, higher spreads in the front of the curve, propelled by as you mentioned, higher yields and T bills and things like that, Tom. But at the same time, look, let's look at the entire composition and recognize that the entire yield curve is relatively flat and take advantage of it. John, I'm I'm tearing up literally library. Oh yes, we haven't

mentioned it a decade. It was like gospel over a decade ago. I've just brought up the chart from a decade ago, and I'll freshen it up and from Bluebird Radio you'll see it first time. I can't talk to John you, so so my question doesn't wait wait, wait, does anybody care about libr o I s you care? You care? If you are a saver and want to embrace these higher yields and find ways that have capital preservation and utilize this structural widening to do that. That's

why you care. Don't sell on the alarm and break and break the firebox yet so dry as you speak to the other Portfonio managers at PIMCO, are you seeing a situation evolved where short rates starts compete for capital elsewhere in things like investment right in things like high yield Is that happening? Well, what you actually see is that um, we no longer are are the of the

opinion that front and rates are undervalued. Let's say so at this point in time to year notes right or at two point two six is pretty welfair value for at least three rate hikes over this year and so forth and so on. The risk to us that we think is that the propensity that we have additional hikes that the market has now been put on guard for, in part by Palace testimony yesterday day of what happens

in two thousand, nineteen and twenty and beyond. And so if you can see continued growth, things that are in the five year the tenure sector perhaps are a little bit underpriced or grossly mispriced if you see actually growth and further tightenings that need to occur over that horizon. So that's really the debate at this point in time in terms of crowding out, It really becomes in terms of what's your target horizon, what's your what's your notion

for volatility? Again, all volatilities and fixed income actually are resoundingly low compared to what we've seen inequities and things like that in the response function. Even to past testimony yesterday in in rates fall until getting lankish was was none basically, So we have to basically do it as as not necessarily crowding out, but really trying to find utilize the front end as a way to meet objective just for sheer optionality and more importantly flexibility for the future.

People who want to incorporate the front end are utilizing as a holding place for reducing volatility and flexibility for future allocations. They might want to other outsets as they recalibrate. You mentioned chaman Pal. Do you think he was overly optimistic in his first semi annual testimony. No, I think

he was trying to be balanced. Actually, what he was doing was flexing his muscle to demonstrate that he has that optionality, the same optionality that that you know that Yelling had, a Bernanke had and everything else, but at the same time recognized the fact that he is a voice of one at this point in time and hasn't had a proper caucus to represent everybody, and seeing the SCP dots as they evolved. I just took the average of library oh I asked through the crisis, back when

I was quoting it every twelve minutes. Thank you, folks for those that listen, uh long ago and far away, the average library ois spread was point eight five or nowhere near that. No, nowhere near that. As we moved towards that, does just schrom Snyder start paying attention more, I doubt will move towards that. I just think it's it's just worth highlighting that that there's been a pretty dramatic jump since the end of the year, um and it's something worthy to take advantage of. And again, the

reasons are very different time this time around. Right, That's the key point is the mill you is different. What's the key confidence maker? As we see Library O I s go from dead flat up to point four zero three three confidence maker is that we don't see any structural weakness in the financial system at this time around is simply recalibration of understanding where the financing costs and the ability to under the ability to obtain financing within

the markets is what the critical. So we've spend an inordinate amount of time of the past few weeks, me and my and the short term desk team at PIMCO, and and when you talk to the participants, whether they're domestic banks, banks, they all sort of point the finger at different things, and so there's probably twenty different variables no matter what periodical you say, no matter what they pointed to, whether they say is this bank needs funding, or it's it's the weakness in the dollar, or it's

the people Japanese your end, or whatever the excuses, the point is that all these things are coming together and there is no single weakness per se that we say into this is critical. Running out of time in two thousand and eighteen is library ois the litmus paper that commercial paper used to be ages ago. Uh, they're very related and we're gonna see funding spreads wide and specifically with regard to some financial institutions as a result, But

don't lose sleep over it. Look to utilize it as an opportunity at this point in time, because the fundamental situation is entirely different than two thousand eight. John was that in English? It was I think it did a great this is great. I'm gonna put the chart up. Blue Wood Radio will see it first. I think we have to start clos I didn't mean to bring out an old book, but actually what sick is John, I was wearing this bow tie in two thousand eight. I

can believe that. Jorm Schneider, thank you as always for the clinic. On a blast from the past, libra O, I s we need to stalk China, and we do that. Of course. Of Ambassador Hass to the Council on Foreign Relations, he has a luxury of a terrific China team, including Elizabeth Economy. His even greater luxury is to have a book review from John Faroe. John, you are raving about

Richard Hass A World in Disarray. Well, I just have to say, for anyone that hasn't read A World in Disarray, if even if you have a deep knowledge of foreign policy, it will add something to your life and even if you don't, in fact, particularly if you don't, we'll give you the back history some really important topics that we explore at the moment, whether it's North Korea, China, et cetera. So please do pick it up and give it a read. And I'm really pleased to say that Richard Hass joins us.

Now I'm Richard. It's always great to catsh up with you and get your insight. Once again, China front and center. Can we just take a step back and get your thoughts on the idea that is President She forever. First of all, thank you for that generous introduction. Look, the news from China on one level isn't surprising given the anti option campaign, the amount of enemies that President She has made. The idea that he would one way or another key effective power after his second term ended in

five years, we kind of figured that would happen. There was a precedent for that when Doom Shao King stepped down. He basically was the power behind the scene through the this funny title and the Bridge Association. I used to kid that I thought Juan Thing would become the first violin and the People's Orchestra. What surprised me was that it was done now with five years to go in his second term, and it was done so explicitly and done through the idea of changing or just ignoring the

constitutional UH term limit. And that suggests to me that this is a pre emptive strike. This is a pre emptive strike by Sijan thing that he's sending the message he's not just going to be there for five years, he's going to be there for ten, fifteen, whatever. And it also says to me that there must be significant domestic pushback that he felt the need to do this

pre emptively. Ambassador, we are the honor not only of you today, but speaking with Stephen Saying out of Oxford, with the University of London UH in their um the s O a s Chinese Institute as well, and he spoke of the nuances domestically but also abroad. Was this a preemptive strike against theories such as Ross Navarro? I think it's much more to do with domestic that's the Chinese priority. It's take a step back the fact that you have this thing called the Communist Party, that's this

layer of governance between the citizen rate the economy. On one hand, and the government on the other it's it's what ninety million people who are members of the Communist Party, This whole thing is an artificial construct. It says to me the Chinese leadership does not take for granted as a given the cohesion of the country politically, socially, even territorially.

But I think this suggests is a tougher line on Taiwan, on other issues that would be seen to threaten the and hegrity of Chinese territory, a continuing crackdown on descent, greater role in overseeing the quote unquote private uh sector, possibly a slightly more nationalist line in their in their foreign policy behavior. Just in terms of the relationship between the United States and China at the moment, there is

a conversation at the moment about tariffs being introduced. There is also a conversation from the Treasury Secretary Stephen Manu Chin that maybe the President the United States is keen to return and have a look at t p P once again. Would you like to see more of the latter instead of the former to address the economic part

of China. Absolutely getting the United States decision in the first week of this presidency to get out of TPP, made no sense economically, it made no sense strategically, and it was basically a nice wrapped gift among others for China. China has any number of initiatives from One Belt, One Road to the Infrastructure Investment Bank. This is uh this, this is a signature error on the part of this administration.

And if they're willing to revisit it and basically say, look, we'd be prepared to go into TPP if there were some changes made. Ultimately, it's not only good for the our trading partners. We want China integrated in the region, but on our terms, we want a race to the top, not a race to the bottom. Richard has many say you should be in the White House, you should be assisting at State. Are we anywhere removed from the loyalty president or is it business as usual for the selecting

of people to serve America a tree time. I thought you were a friend before that question. Uh No. I think that's the larger issue that the Jared Kushner issue raises. The dis administration has not availed itself of so much has experienced talent, and whether it's getting rid of people at the State Department or essentially saying any Republican hand who signed any of these letters critical of candidate, it's like original sin and you can't get over it. That's

that to me, makes no sense. Given the inbox they inherited, given the inbox they've now created, they need the best in the brightest and they simply don't have it. Richard House, the president of the Council on Foreign Relations and the author of a must reader world in disarrays, fantastic to catch out with the Richard. We always appreciate your time. Thank you very much. Tom. This issue of China in

the United States certainly not going away. I think this week is actually quite important because there is going to be a key representative of the president of China, meaning with some key representatives on the economic side of President Donald Trump. And I think it's really interesting that throwing into the mix, they've opened the door once again to t P P and let me be clear, when they pulled away from TPP the happiest people in the room with China, I'm gonna get right to it quickly here.

Not much market response so far, tenure you'll comes in a basis point. Mike Mayo with us with Will's Fargo. Are you enjoying Wells Fargo? And then they get a great time you brought in here. This is one of these TV things, folks. It sounds great on radio. Take two. You went to the JP Morgan investors meeting yesterday and you say, seen three from Mr Diamond is Scale? What

did you what did you learn about scale yesterday in Fortress? Diamond? Well, if we had to sum up the annual investor Day by JP Morgan, which was yesterday at their headquarters, it would be we are JP Morgan. Hear us roar. I mean the JP Morigan is expanding in with bankers and branches and bots, and in new markets and in capital markets and investment banking. And they said they will defend

their turf. Jamie Diamond, the CEO said, if there's upstarts new competitors, they'll spend a billion dollars, they'll spend five billion dollars. They'll spend whatever it takes to preserve the long term franchise value. Is the long term profitability there or is that confidence from a one off of tax legislation. We forecast JP Morgan to earn inns to increase by fifty percent over the next three years. So this is

more than just the benefits from taxes. We see this as a twenty five year progress from national banking that was first allowed in the mid nineteen nineties. You're seeing the benefits a scale more than ever before in the banking industry, and JP Morgan is showing some of that. What did you ask them at the invest today, Well, my question was, you know the sunshining, you're happy, you're building a new seventies story skyscraper replacing your headquarters. Basically,

is this the sign of a top Uh. They said they'll do whatever it takes for the long term health of the company. Jamie Diving, the CEO, said to be frank. He doesn't want to change his office. He doesn't want to move, and they aren't in locations fortune other locations around the city. So it probably will become more efficient. But you have to ask the question, you've been around the street a long time. Is this the most confident

you've seen J P. Mugen since the crisis? I think this is the most confident I've ever seen JP Morgan. So back to that director's board that even before the crisis, this is the this is confident you've seen them full stop, period absolutely. I mean before JP Morgan bought Bank One and Jamie Diamond, this was a hodgepodge of what we called money center banks, remember Chasing Chemical and Manny Handy

and Legacy JP Morgan. Then Jamie Diamond took over JP Morgan and built up JP Morgan through the financial crisis. But now you're seeing the benefits of scale without the distraction of system integrations of financial crisis, new regulation, so you're seeing these benefits more than ever before, both in retail banking and in capital markets. It really was, you know, quite amazing, and that's why we had to ask the question, you know, what makes you nervous, Mike Mayo Take four?

Is that what you wanted to do? Cinema, we gotta tell me you're killing me this morning. That was brilliant, no idea. What you were doing is the optimism justified from what you see and one of the risks that this tax builds, as Holmes point that this tax bill just gets competed away. Well, that's a great question. First of all, um, we see both structural and cyxical benefits to the banking industry. The balance sheets and JP Morgan's

balance sheet is the strongest that has been in a generation. Um. In addition, you have the benefits of the tax reductions, which certainly helped the banking industry. And some of that money will be put to employees, some two communities, but some to shareholders. And the bottom line, what happened to your interest rate? You know at the start of the year nothing if you're you have a loan, so it takes a few years for this to be competed away. It will be passed on gradually, but not at the start.

Here where are the other j people? Morgans? You are a harsh critic of governance and Bank of America. There's all the challenges at your bank, which I know you're not going to speak about, but across regional banks, across two big defens to the single word that matters on this, Mike Mayo, take five scale. Where's the scale going to be for everybody besides JP Morgan. Well, that's a big question. That's a message that came out from the conference yesterday. Thomas.

You know, I've covered the banking industry for thirty years. We've got a lot of research on JP Morgan. But walking out of that room yesterday, it tilted the debate more in JP Morgan's favor. When you're talking about it a new fintech startup, you're talking about a mid sized bank dethroning JP Morgan. They're saying, it's not too easy. We have big data, we have computer power. They increased their technology spending by to eleven billion dollars every year.

How do the smaller players compete against that? So there is a question about more consolidation in the banking industry. Is to predicting that definitely. Okay, Mike Mayo will thank you so much. John. I'm completely depressed Mike Mayo, and I like at the beginning a million years ago when he was like nobody in the industry were like, who the hell is this? Kidded CSFB. And the problem is, thirty years on, John Tucker, I look like a fossil. In thirty years on Mike Mayo's cutting chisel. It looks

like he's thirty nine. He's still looking good and he's still going around with props. And I'm looking forward to him taking that prop from Bloomberg Radio to Bloomberg TV blog. Mike Mayo. Al Right, my Mayo with a target of one thirty on JP Morgan one thirty with a stock already at an all time high of one. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer.

I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio