Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway and I'm Joe. Isn't all so, Joe. This is a very special live recording.
I'm really excited about this one. Always enjoy live recordings. We talked to our guest recently a few months ago, and a lot has happened since then, So.
All right, let's just jump Yeah, you've given it away, Steve, but we're going to be speaking with Steve Eisman. He is, of course, a senior portfolio manager over at Newburger Berman. So thank you so much for coming back on the show.
Steve. Oh, thank you very much.
So let's see, the last time we spoke to you, you seemed okay about the banks, and.
I don't know if I would say, okay.
Okay, Well all right, let's talk about what happened since then. What what did we just see in the financial system?
So if I could sum it up in like a sentence, because it's always pretty good to try and sumon up in a sentence, I'd say, we're not having a banking crisis. We're having a crisis of certain banks. That's like a really good frickin line. So pay attention. So I mean the saying goes that generals always fight the last war. The last war was credit quality and capital, which that problem was solved. The problem with Silicon Valley was that
the correlation between all their depositors was essentially one. In other words, they were all the same. It would be as if, you know, you had one depositors with one hundred and fifty billion dollars in the bank. And what happened was Silicon Valley had a very simple business model. They just took in deposits from VC and they bought months. That was it. They made very few loans and gave great service, and so when rates were at the bottom,
they brought long term bonds at subterranean rates. The Fed starts raising rates. Who knew, and all of a sudden they have massive mark to market losses in their portfolio, which if they had, which essentially wiped out their equity. But that's not enough because you could always hold the bonds to maturity unless you got to sell the bonds. So if you remember last year, the stocks that were down the most were the companies that had high revenue
growth and negative earnings. They were down anywhere from seventy five to ninety percent. That characteristic is the same thing as venture capital companies. So venture capital couldn't raise any more money. The venture capital companies had to pull their deposits out of the bank. Eventually, Silicon Valley rate out of liquidity, they sold their bonds, and the rest is history. You know, thank you Peter Thiel for closing a panic and the next morning they were done. That was essentially
the story. So after that, everybody, you know, basically started running every single bank that had the same characteristics as Silicon Valley signature which went that same weekend. First Republic pack West Western Alliance. Obviously, First Republic is gone. You know, probably this part of this crisis is largely over. There's a problem with the earnings of the banks, but I don't think it's unlikely. I think at this point that anybody else is going to go under.
Well, you mentioned and you know, the generals always fight the last war, and so people weren't paying very close attention to depositor correlation, it would seem the supervisors apparently not. And then of course, you know, people were not concerned. They're like, oh, credit risk is solved, and then maybe they weren't so aware of the rate risk.
The problem was they don't read the research. If they read the research that's out there, they would have known the losses to the to the dollar. But it's in my experience that regulators don't read Wall Street research and they try and find it out on their own. It's a lot easier just to read the research, trust me.
So from your perspective, though it was out like there.
Are, there's no questions, There's absolutely no question, no reason. There's absolutely no question that the investment community knew what the losses were on Silicon Valley's portfolio to the dollar.
Huh, Well, can I ask you? I mean, let's say we have a FED meeting coming up, obviously, and you know there's a lot of debate over whether they're going to pause or hike again. But if they hike again, how problematic would that be for the banking system?
Now?
Well, I mean, what's what happened during the pandemic was that was the banks were flooded with liquidity, and so what's happening now is people are but you know, what were you going to do earn twenty five basis points and money market funds and sort of pointless? So now I don't know if any of you notice, but you know, if you want to buy a three month treasure, you
make five point four percent. That's not bad. So people are taking their money out of the bank and putting it to money market fund So what's happening is the regional banks are really pulling in their horns in terms of lending. You know, do I think that if the FED keeps raising rates that will accelerate. Maybe, but a lot of it's happened already.
Just to stick on the banking system for another minute, you know, like obviously there's another cliche that's out there, like the FED keeps raising until something breaks, and then when SVB happened, like, well, there was the break that happened, except it turned out that wasn't the end of the hiking cycle like it would have been. That would have been like, you know, if you're writing history, you could have imagined a version where SVB is the end of.
The hiking cycle. It broke not big enough. It just wasn't big not big enough, you know, as I always I said long time ago, when JP Morgan goes down, Planet Earth burns, when when Silicon Valley goes down, it's a match, you know, like a match.
You know, well, okay, one one more ba.
More than a match, maybe a match book.
One of those like automatic rider things. One more banking question, but you mentioned might have.
One more banking question, okay.
Full disclosure. Uh you mentioned profitability. There are financial is a good bye in an environment where maybe they have to compete for deposits a little more and rates are going up and NIM is getting net interest margins are getting compressed.
I mean, there's always a trade.
You know.
The banks are very very cheap on a price to book. They're very very cheap on earnings. You know, the problem is that because of the money leaving the banks into money market funds, it's more likely than not an estimates are too high, you know, longer term, you know, if big, if we go into recession, we'll have a credit cycle. And I mean the joke in amongst the people you know that what I call the financial services mafia is the banks have collapsed and we haven't even had a
credit cycle yet. So you know, if you want to financial services mafia, can it tell you?
Okay, but there is there.
Is, but they they are known, Okay, I know almost all of them. Okay, now these are the people who traffic in largely you know, the financials for twenty years. Okay, and you know it's not like we go on vacation together, but we know each other. In fact, we don't go on vacation together.
Okay. Well, just you know when after as IVB collapped. One other element of this was like do we really need so many banks in this country? And the people look up North and Canada and they're like, they only have like six or seven banks here and we have I don't know, fifteen thousand or something like that.
More like five thousand.
More like five thousand are we gonna have? You know, in ten years, will we be done with a thousands? Like how much consult? No? Really, no way.
First of all, the regulators will not allow JP Morgan buying First Republic is one off. The regulators do not want the large banks to get any bigger through M and A. You know, could there be mergers between regional banks, sure, but to go down to from five thousand to a thousand, I mean that's a lot of work. You know, it is choose your poison. In Canada, the banks are safer because they're oligopolies, but they can charge much higher fees
for their customers. Here there's a lot more competition, but because there's a lot more and because there's a lot more competition, prices are lower. But then you have problems with credit and just stability.
Sorry, you just reminded me of one more banking question. So apologies in advance. But you're an expert in moral hazard basically based off of yours.
I don't know if it's an expert you.
Have experience with moral hazard. What do you think about deposit insurance in the aftermath of SVB. I mean, the depositor has got a full bailout. There's now discussion about, well, why not just have universal deposit insurance? What would that mean?
Well, if it had been up to me, and believe me, it was not to me, and nobody called me over that weekend. But if it had been up to me, I would have let Silicon Valley fail and then I would have guaranteed all the deposits and that would have solved your moral has its problem. I mean, it's not like they guaranteed Silicon Valley and they guaranteed all the deposits and people didn't pull their deposits out of these banks. So you would have been in the same situation, but
you would have solved your moral hazard problem. I actually don't know technically if the regulators even have the authority to raise the deposit in churns level unless it's an emergency.
I think it would require some sort of act of Congress. But regardless of good luck with that, right Senka said, whether it's even doable, right, there is this question that a lot of people felt after SVB and they saw all these depositors immediately made a whole at one hundred cents on the dollar. Why is banking like a private for profit enterprise as a thing if there's sort of like key aspect of age.
I mean, the problem is when whatever these things happen, it seems like the regulators adopt the attitude that if we don't do this, we're going to have the system's going to burn. You know what, system's not going to burn. You know, in two thousand and eight that was true, you know, with Silicon Valley really wasn't true, but for some reason the regulators felt it was true, and that's
why they acted the way they did. I don't think, you know, for what it's worth that I think that deposit insurance is going to be guaranteeing everything within after the first twelve months.
Was there anything in the recent banking drama that reminded you of two thousand and eight or was it just completely different?
Totally different? You know, the problem with what you're hearing about. You're hearing about the regulators raising capital requirements by you know, ten percent, twenty percent. That's useless because this wasn't a capital problem. This was a liquidity problem. And by the way, no matter how much liquidity you might have, you don't have enough does a run on the bank. So this is more of a I think, an examination issue rather than a liquidity issue and a capital issue.
By examination, you mean the examiners of.
San Francisco examiners should have been all over Silicon Valley, you know what. I think what the press said was that they went in and they suggested nicely that Silicon Valley start looking into its issues. You know, a regulator should not be asking nicely, they should be telling meanly. But for some reason that wasn't done.
Well, what responsibility do you think tech has in this whole saga, because I mean, the last time we spoke to you, we were talking about the stunning continued resilience of a lot of tech growth stocks, and it feels like that wave of money is alive and well, but kind of more flighty than it used to be. And in this instance, it basically infected the financial system.
I'm not following you. What do you mean infected the financials?
Well, it got into the banking system as tech and vcs kind of pulled their money away from SVB.
I mean that's true. I mean part of the issue is that it's so easy to move money today electronically. I think it was a very big mistake by the regulators to allow basically every Vingle VC fund and every single VC company to bank with one bank. That was you know, reminds me a little bit of the sub You know, people used to say in terms of subprime mortgages that you got diversification. And so the affair was a low correlation. It turned out it was a correlation
of one. This was more obvious that it was a correlation of.
One in the UH, in the finance industry mafia. Was this something? Is this something that comes up and people aware of this or was this like, oh what where did this?
Now they were aware of it? They were aware of that, they were aware of signature First Republic. I mean, it's just math in.
Terms of risks in the financial system. Now do you think think like there's a strong case that we should be looking more at deposit concentration. And also maybe I don't even know how you would measure this or enforce it, but like social media risk, the idea that people all start talking about, like, oh, Credit Swiss is in trouble, SVB is in trouble. First republics in trouble.
Well you know what Credit Swiss was in trouble. SVB was in trouble. First Republic was in trouble.
Well, this is why it would be hard to enforce, you know.
No, but they were actually in trouble. It didn't matter what was being said on social media. So I don't put a lot of stock.
In that, Okay, I keep saying, like last banking question, but how much did the experience of you know, two thousand and eight, two thousand and nine, the regular the reforms DoD Frank, et cetera. Put the regulators in a position like had something like SVB happened in a different era, would it have been worse? How much did the sort of post crisis changes make it such that you can have a pretty substantial regional bank fail without much spillover.
I think the regulators learned was that you have to be fast. So the fact that they guaranteed deposits over a weekend and seize two banks was very important. So they did learn that lesson, But they weren't looking for liquidity, you know, duration problems.
Should we talk markets wider markets? Yeah, you know what I'm we should just throw out some single stocks and just have you Yeah, but why don't we start started in video because I think that's like the.
Figure not going to do buy sold. That's fine because my firm would shoot.
Word association, word association.
Yes, and I mean literally shoot men. Okay, this tomorrow morning. So what do I think of Nvidia? I mean, let me let me tell you what I think. Well, the whole chat gpt AI situation. So, I mean, as everybody knows, the market's been very narrow this year. If you take out the eight big tech stocks, the market is maybe a one or two percent, you know, in terms of what's happened so far. You know, Vidio is selling a lot of chips because everybody wants to get into the act,
so they're sort of stocking chips. But what we don't have yet is really too many apps. And so I love the story that was in the papers about the lawyer who had a case he had to write a brief and so he asked chat GPT to write the brief and all the citations didn't exist. That guy's going to be disbarred. Okay, thank you, chat GPT. So the apps aren't there yet. So right now, you know, this
story is just just in a few data centers. You know, at some point in the next six months or so, it'll probably get rolled out into all the data centers in the country. But so the beneficiaries are the people who sell the hardware, the chips, send everything connected to the chips, the obvious companies that have the data, and then after that we really don't know, you know, does this benefit into it or not benefit into it. Does
this help eccenture or hurt Accenture. It's unknown, and we don't know yet who's going to be creating good apps that's going to do very well. So right now the story is very narrow in terms of investing.
But the market seems to I believe the market seems to be of the view that the incumbent those eight companies, however, many of there are Meta Alphabet and Video Microsoft, that they are going to accrue the big financial gains from AI in general will somehow accrue to them. And do you think, like how confident would you say? Like, is the market right? Is the market overly confident in the.
I mean, who you know, I'm not a fortune teller, although some people think I was a fortune teller, but I mean that's the obvious case. I don't have any reason not to believe that, you know. But we'll see in a year or two years, what's going to happen. This is, this is this is not going to happen overnight.
Well, how should investors think about you know, there have been many instances at this point of people coming out with revolutionary technology of one sort or another, often packaged under a very exciting name like Generative AI. How should investors think about that?
Like, We're got to give you an example of a group that used to be hot and it is not the payment space h Okay, PayPal, Square, et cetera, et cetera. So so, by the way, I've done payments for a very long time, and I will tell you that every five years, somebody comes in and says, I got this
thing that's going to completely disintermediate Visa and MasterCard. I swear to every five years like clockwork, and two years later they come back and they say no. So other than Visa MasterCard, who has long term staying power and payments,
is never obvious. But the space used to be really really hot, especially the companies that you know, again big revenue growth, negative earnings, and but what's happened over the last several years is so much capital has gone into this space that they're basically killing each other and it's not hot anymore and people are exiting. Is that going to happen to chat GPT? Less likely because you've got real bohemoths that are going to be spending a lot
of money. But you know, around the app part, we'll see what happens.
But it seemed there's a good chance that maybe outside the behemoths, a lot of money will be spent from companies that just kill each other and drive each other into the ground. Reason So obviously, you know when you see a company like in video uh trading at over thirty x revenue.
It's actually not trading at thirty x revenue. It's trading you know after the the most recent uh you know, the stock one of twenty six percent, but the earnings doubled. I think, you know, the pe got cut in half. So I don't remember where the pe is right now, but it's not insane anymore. It's actually lower than it was before they reported.
So when you see that, like obviously and it seems sort of lazy, and people like dot Com this is Cisco, this is loose you know, Sun Microsystems, just these like completely unreal when you when you look at these numbers, like they don't look like unreal. They don't look like some of those numbers from those.
Well, I'm gonna look at videos the pure play. Yeah, then there's a MD We'll see how well that their new chip is going to do. You know, how much is this going to add to the earnings of Microsoft and Google and Meta. Well, it's not gonna be as much as in video obviously, you know, but how much
it accelerates the growth rate. I mean, we're really not going to know this for a couple of years because, like I said, it's gonna take time to really develop something that's not going to have somebody write a brief where all the citations are wrong. I go back to this over and over again. It's stunning to me, Tracy, I would not read the site. I used to be a lawyer. That a lawyer would submit a brief where he does not read the citations and the brief is astonishing.
I think there's someone actually suing chat gpt for defamation now because of some of the stuff it spat out from that incident.
Tracy has seen many of my attempts to use chat gpt for work, and so is well aware of a let's just say it's not it's not mission critic, it's not mission ready, it's not.
Ready for prime time. I do think it's very sweet that Joe is always very very polite to chat gpt just in case the robots, you know, eventually take over the earth hedging your butts.
That's true, I would say, please and thank you.
Well, that's good life advice. Okay, Well, just on the broader market. I mean, the last time we had you on the podcast, you were talking about a new paradigm for markets, and you are very care careful to emphasize that this doesn't happen in a straight line. You know, there are fits and starts. People hold on to the old way of thinking, you know, for as long as
they can. Sometimes, when you look at what's happening with some of the tech and growth stocks right now, does that support the thesis is this the last gasp of growth?
I mean, for example, let's go back to the high revenue growth, negative earnings companies. So they're up a lot this year on a percentage basis, But when you go from two hundred to ten and you're at fourteen, yeah, it's up forty percent. But so what you know, the large cap mega companies I think are investible for a very long time, but after that it's unclear. And I think, I mean, if anybody gave me their money today, for example, I wouldn't be so overweight tech. I'd be much more diversified.
I'd have some god forbid bonds. You know, there's plenty of other stories other than tech, such as I mean, for example, has anybody ever noticed that the electrical grid in the United States is pathetic? You've noticed, you know. I don't know if everybody said, there's this new rule that came out from the governor that says every single new building in New York State has to have an electric oven. Well, if we could snap our fingers and
just do that, there'd be a blackout immediately. So you know, there are companies that are involved with the electrical grid. There's reshoring, there's greenification, although you know the solar companies sell it insane multiples, but there are other ways to play it. And the other concept that I think is going to come back is what i'd call risk adjustice returns. You know, risk adjustice returns have been out of favor
because everybody just wants to invest in tech. I think the world's going to be, you know, with if rates stay high. I think that's going to That is going to happen because I think Vulgan, I think Vulkar it's Fredian slip. I think that Powell is petrified of doing what Vulgar did, would would stop raising rates, cut them a little bit. Inflation soars and he has to go to seventeen percent.
So many different directly, Actually, what do you mean when you talk about risk adjusted returns coming into vote?
What do that mean?
Specific? Risk aggestion returns means how much return are you're generating given every unit of risk. There's mathematical ways to figure I thought all investors, I thought that you're kidding. People haven't focused on that. In the last ten years, you could have been paid to take as much risk as possible. So that concept, which was in voked for a very long time, has been people have just stopped paying attention to it.
But it sounds a lot like value investing, right, No, keep predicting value.
Not value investing. It's you know how much volatility is in your portfolio? How diversified are you don't want to be too diversified? You know what's the beta versus alf in your portfolio? That those are the concepts that I think you're going to start to come back. You know, I had just as an example. You know, my partners and I, you know, we run separately manage accounts. Everybody's got a different profile. So I'll just give you one
extreme example. I got a cold call from a woman who you know, saved about a million dollars by killing herself basically, and she gave money I won't say the name of the very large bank to manage her money, and they obliterated her. I never saw a portfolio like this. Every single security she had had a loss. So she comes to me basically with PTSD, and I promised her
I would hold her hand. And so I've only invested a few, you know, and a few stocks, and otherwise I put her in bonds and treasuries, and I figure after about a year, maybe she'll have the emotional ability to invest in stocks. So look, I think you really had. What's also going to come back is catering to everybody's individual risk profile as opposed to just putting fifty percent of your money in tech.
As we're since we're talking about paradigm shifts, and you know, you mentioned powells fear of you know, having to go into the teams to fight inflation. I'm curious, like we have the market does seem to be like go through these phases of like, oh no, this is as far as gonna go. So we're gonna go to three and a half percent, So we gonna go to four. Okay, we stopped SVB. That must have been the top. Oh no, we're going to like pause in gin. But it looks
like we're gonna hike in July. Does this process, in your view, have further to go in terms of.
People have lived with low rates for so long that it is unimaginable to them that the Fed's going to keep rates high. They just can't imagine it, you know that They were like, oh, the FED will cut rates in the second half of this year. That was never my position, but that obviously was the position of the market, and that now seems to be going away. So but like I said, you know, people I like to say,
you don't think about your paradigm. You inhabit it. And one of the paradigms is that we're all entitled to live in a zero rate world. That's gone. Just everybody hasn't woken up to that.
Well, just on this note, can you talk a little bit about what's going on in consumer discretionary because those stocks have been doing really well, and yet there is this or there seems to be this big question mark over the strength of the American consumer. So if you look at the surveys, I mean, a lot of people seem to think we're basically back in the depths of two thousand and eight. Oh, definitely are if you look at the hard data. The spending continues. So how are you.
I've heard from some companies, you know, very large banks that really have the best data that consumer spending has really slowed in the last couple of months. The consumer is still relatively healthy because everybody's employed. So you know, you're not going to see like a real deterioration and consumer credit or anything like that until people start losing their jobs. You know, is that going to happen. I don't know. I think it's probably more likely than not.
But until we start to see unemployment go up, you're not going to see a problem with the credit. That doesn't mean the consumer is not going to pull in their horn. I mean you're starting to see that in a lot of different retail companies. I mean, I think everybody's saw a dollar general how much that went down because spending was you know, spending at the lower end is slowing. You know, people are starting to trade down.
So it's happening behind the scenes, but it's a little glacial because everybody is employed.
On this theme of sectors that stay buoyant because people have jobs. Housing, big surprise over the last year, home builders continuing to.
Do very well.
Maybe they're a little bit off their highs, home prices not far off their highs, only modestly. I know, we talked about this in March, but it seems like home prices are back on the rise again, Like is there they are?
It's actually very I mean, I mean the first to men, I was wrong about this. You heard it here. First surprised that the home builders have done so well with rates so high, but you know, there is a shortage of housing. I do think that existing home sales are still fairly low because with everybody employed, and if you have a three percent mortgage, it's hard to sell your house and buy something else if you want to trade
up and get a seven percent mortgage. But the home builders have been very good at, you know, cutting of some of their prices, in their costs, incentivizing people through their internal mortgage companies. I'm actually very impressed by what they've done.
We talked a little bit about residential real estate the last time we had you on. We didn't get to commercial real estate. I don't think and I'm kind of I'm jumping the gun remembered, I'm jumping the gun a little bit because we have had some audience questions on this topic. But how are you thinking about CI risks at the moment?
Well, I mean, there's a lot of different categories of cre Well, let's talk about cap rates first. First of all, leave aside fundamentals. You bought something when rates were nothing, and you paid a three percent debt and your cap rate was let's say three or four percent, and now if you wanted to borrow, you're going to pay seven or eight. The value of your real estate went down. Period.
The area that is the most problematic is obviously office, the areas that are probably the worst of San Francisco in New York. I'll just give you a shocking statistic. I've looked at it the other day. I was stunned. Do you know what the market cap of Vernado is? Two billion?
You should let me get us. I was going to say three billion.
But two maybe it's kind of maybe it's two point two. That's unbelievable when you think about it. So you know, the market has really repriced the public entities, but the private entities really having marked down their portfolio there because nothing is trading. There's about one hundred and seventy five billion of office debt coming do this year and about one hundred and fifty billion of office debt coming to
do next year. If you took out a loan let's say three four years ago to buy something, and the LTV was sixty percent. Today it's probably one hundred. So I mean the issue is the refinancing, and I think it's going to be tough.
So you mentioned the isn't trading. Is this one of those situations where maybe illiquidity can be your friend if you don't they.
Don't have to market down because you know you don't have to sell anything, right, Well, the problem for you is that when your debt comes doe, then you got a problem.
Until then you could, as we like to say, extend and pretend.
At some point, could there be a do you think about a point where you can bid on the public equity or public aspect of Siria? I mean three billion? It does seem like, oh, you were talking about like the end of sort of like New.
York work as I haven't done enough work on this, okay, but people that have say it's very problematic because I mean, I'm sure some of you have seen, you know, Blackstone and Brookville. I mean, these are not small companies have given back the keys for some of their pretty good buildings because you know they know that debt's going to come do in a few years. They know what the cash flow is going to be, and they can't support
the cash flow, so they're giving the keys back. So if Blackstone and Brookfield are giving back buildings, you know, how's everybody else going to be? Now there are what i'd call triple A properties in New York City. I don't know San Francisco as well, like you know one Vanderbilt, but after that, you know, after a couple of abilities that are like that, I think the rest are problematic.
Since you mentioned interest rate costs, it feels like people have been predicting. I think we touched on this earlier as well. But people have been predicting a turn in the credit cycle for years now and it has yet to happen. We've seen maybe some idiosyncratic bankruptcies, but nothing sort of on mass or systemic. What would be the catalyst for that actually happening?
And how like, I actually don't think there is going to be. I think there will be. I mean, look, if we go into some kind of recession, I think there will be a normalization of consumer credit. I don't think the consumer is over levered. There's really no subprime mortgage lending in the United States at all. There's very little subprime credit card lending. There's some subprime order lending.
But whatever problems happening is not going to be I think in the consumer area, like I said, there'll be normalization. You know, loan loss provisions in the banks will go up. It's not a calamity. You know what's going to happen in high yield office, et cetera. But those problems will be you know, for example, the office will be concentrated in cnbs and in certain regional banks, so it's going to be more concentrated as opposed to systemic issues.
I have a career question or maybe a career advice question. Very knowledgeable on banks, obviously real estate, knowing specific buildings, thinking about understanding payments, et cetera. How should we How do you like allocate your time? Because it's you know, I don't know this stuff.
What do I do all day?
Is how do you allocate your time?
To have the morning? I have a cup of coffee, you put black iceed. We're on the same I get into the office, I start to read all my emails. You know, I log into Blumberg thank you, and you know there are companies are coming to Newburger, I go to the meetings, I do some research on individual companies. Trading day ends, you know, there might be some more to do when I go home. That's that's my day.
What piques your interests though, Like, how do you make decisions about whether or not to get really into a sector or a company?
Look, it depends. I mean, I mean, I'll just give you one stock, which hopefully Newburger won't shoot me tomorrow about. So we've owned a company for a while called Quanta. We have it in most of our portfolios. So Quanta is a company. You know, utilities don't do anything. You know, somebody has to build the utility, someone has to manage the wires, somebody has to bury the wires. So you know, Quanta, prior to all this grid stuff, used to sell it
ten to eleven twelve times earnings. But because all the stuff of evolving infrastructure, the opportunities for the company have been enormous, So the stock has been revalued. How often does that happen? Not that often. But you know, when you have the potential to do something like that, you go all in. But it requires a lot of work.
But this was something that as you saw infrastructure coming, and because you were familiar.
I'll give you an example of what we saw. So, you know, the utility in California, I think it's PCG. You know, there's a strict liability rule in California that basically says if PCG causes a fire and is only partially responsible, they're completely responsible. So the old CEOs of PCG weren't too good. The new CEO is superb, and so she's embarked on this plan to basically bury all the wires of the company. Think about what that means. This is not Rhode Island, this is California. That's a
lot of wires. You know who's doing that quant them? So you know that's gonna take years to do. But so stuff like that is, you know, the infrastructure stuff in the United States is pretty pathetic.
Now.
I remember years ago, maybe like twelve years ago, I had a conference in Hong Kong. It's like, fly in the airport's completely new. You could literally eat off the floor. You get into a car, you get onto a highway, it looks like the highway was just built yesterday. You go over a bridge, you go did they just finish this yesterday? And then you know, you go to this wonderful hotel, and then you come back to the United States.
You can go to JFK and you're embarrassed, like this is the United States of America a lot, like it's unbelievable. Then you get on, you get on the Van Wick and the Grand Cential Parkway and it's I mean, it's just unbelievable. By the way, have you noticed that when you're driving to JFK where the Grand Central meets the Van Wick, there's this construction there. You know how long that construction has been going on? Twelve years? Like twelve years.
I could have done it myself faster, Like what's going on with that?
Like Guardia isn't even connected to.
A subway way. Yeah, but that's better than the Van Wick.
It is true. I went to the Seychelles recently, and I will say, like a tropical island in the middle of the Indian Ocean has better roads than coming back from the airport from JFK and fewer potholes, which is rather amazing. We could listen to Steve Rant about US infrastructure for a while provide insightful commentary on US infrastructure for a few more minutes. But we do have a lot of audience questions.
Shall we take some Yeah.
All right from Tim Lintern asking what is the trigger for higher unemployment?
The problem with making a big case for higher unemployment is if it is a shortage of labor. This is a little bit of the revenge of the middle class. So you know, the two thousand and eight crisis destroyed the lower middle class. In the middle class here the layoffs in tech at Wall Street, the middle class is actually doing quite well. I mean, what would cause a real uptick and unemployment. Look, if the Fed keeps raising rates and the economy really starts to slow down, there'll
be some layoffs. Do I think they're going to be very high? I don't because the labor sortags are still so important. People may want to warehouse their employees.
Here's a question, since you mentioned your knowledge of the payments industry Casey twelve twenty one, as what about Apple, you know, in terms of a company with just incredible like mote in some way, right, there's always talking there coming a bank or Carridge or whatever. Could they make further inroads in payments and become an entity that takes share or profits from someone else.
I mean they certainly could. I mean, it's so easy to pay stuff with Apple. Yeah, so I do think Apple's already making inroads. You know how much farther they want to go. I don't know. You know, there's the Apple credit card that's run by Goldman Sachs. I don't think Apple's ever going to really make a bigger road in the credit card business, the payments business probably.
Another question from ABE one asks what are your thoughts on private credit? Will direct lending replace commercial bank lending long term?
Well that's an excellent question, you know, given let's assume the regulators do raise the capital requirements for all the banks, it's going to force the banks really to at least that the regionals to really narrow some of their lending, because they're only going to want to make loans where
the risk weight is low. And I know that the private credit lenders are literally salivating over this happening, because you know, Dodd Frank under Trullo, who was the vice chair of Financial Supervision, not only did he lower their leverage by like he cut it basically in half, but he narrowed the scope of what lending they could do, and that really opened up for the private credit lenders, right, you know, assuming that happens again, the private credit lenders will have even more room to play.
Another question, the reshoring boom. People talk about restoring friends shoring. You know, as you talk about this new paradigm, partly may be kicked off by a lot of the public investment being made for IRA and Chips, et cetera. How are you think about that? What is like what do you see a sort of maybe the medium term of some of these trends and different ways it could shake out.
Well, I think general reshowing is going to take time. Yeah, you know, factories aren't built overnight. I still think that's probably a reluctance by companies to bring all of their shoring back to the United States because they're so used to cheap labor. But I do think, you know, part of the story, given all the legislation that's come back, is something of a reindustrialization of America. How long that's
going to take, I don't know. I think that, like I said before, the biggest story is going to be the grid. The grid is is absolutely crucial. I mean, the estimates of improving the grid in the United States are and everybody's got a different estimate. But it's like twollion three hundred billion fire. I mean, it's unbelievable numbers. That's going to think it going to be the biggest theme.
Actually, I'm going to ask my own question based on that answer. But why do you think the US seems to, at least in recent years, be quite bad at infrastructure?
Oh, we haven't spent money on it in generations?
I have.
I noticed. You know, when was the last time. Let me put you this way, in the New York metropolitan area, every highway, every every parkway, every bridge, every park was built by Robert Moses. You should all read the book by Robert Carr or Robert Moses superb. That's the thirties, forties, fifties, and early sixties. That was the last time the United States really spent a ton of money on infrastructure. Our infrastructure is just very, very old.
But what I mean, I guess my question, why why can you issue all this?
I'm not president of the United States. Go ask the last several presidents why ay didn't spend money on this? But they didn't.
Well, current and former presidents of the United States have an open invitation for all.
Thoughts absolutely well. Speaking of infrastructure, I don't know if you have a view on this. It's not particular commodities. People talk about copper.
I have no opinion, no opinion. There are enough ways for me to lose money without going into commodities.
Okay, here's another question you as consumer restart of student loan, is that something on your radar or is that not big enough dealing with He's rolling it for people who are listening.
I mean, I will just tell you know. It's putting out my lawyer hat. Supreme Court is probably going to rule that what the Biden administration did is not kosher. But I actually think that the people are suing literally have no standing to sue. But given the composition of this court, they're basically not going to care. So I think the case is going to go against the Biden administration even though it shouldn't. The court just throw it out, but they won't.
A question from Nathan Tankas he asks it's an interesting one. Is there an index which you would prefer that more properly weights tech relative to the S and P.
No comment?
All right. I have another question that was put in there from Nathan. It was regarding SVB. You said, the weight that they ought to have dealt with it is let the UH, let the bank fail, and then guarantee let the bank fail. But how does that solve moral hazard because they never wants.
Because everybody would know that if the next bank, you know, eventually we'll take away the deposit insurance and if your bank fails, we won't guarantee you. Maybe we put guarantee.
So basically the guarantee you gotta be diversified.
I mean, I'll give you an example. Okay, So I have a friend who runs a VC company and the Thursday of Silicon Valley in the afternoon, he freaks out. He goes online and he pulls all his money, and then he wakes up Friday morning and his money's still in the bank. So he runs to the branch. He's fiftieth in line.
I didn't know that people got in line.
I know they got in line. There are fifty alpha males with tens of millions of dollars in the bank. I used to be an alpha male. I'm not. I'm a beta, and don't ask how I got there. And they're all waiting in line, and a woman comes out who's probably like a teller, I mean literally, and she comes out and she says, I know you're all here to get your money, but unfortunately the bank has just been seized by the federal government and we can't give any money anybody. So the first guy in line starts
screaming and he says, I'll clean it up. He goes, I want my f and fifty f and freaking million dollars, and she says she says, sir, I just lost my job, and he starts screaming, I want my fifty f and freaking f million dollars. And that guy could have learned a lesson about diversification, because if he had, he wouldn't have been there.
The teller needs to give the It's a Wonderful life speech and say, yes, it's porfolio.
You shouldn't say that because most of the people in this audience don't ever saw the movie.
So it's okay, Resistance people have seen it's in the GPT.
I have.
Well, well, I mean we can keep going, but one more question.
Keep going? I got nothing to do, all right.
So you know people are asking for free portfolio advice at this point, but which if.
You want portfolio advice, I'll give you my card, you can come invest with me.
Which sector slash stocks are at most risk for a short squeeze in the next twelve months. That's from Georgina.
No comment, no comment, All right, my friend would just kill me.
Here's a question. I think it actually ties back to a bunch of someone asks your thoughts on American exceptionalism, and I think it sort of ties to this. No, it ties to like, can we actually setting aside the money, like, because there is a lot of money, like build it. We know that there's money going into factories or structures booming.
But then there's a question of like, okay, we're going to do a good job of it, and with a lot of this green spending, with a lot of this reshot, like, are you confident that with the money there that like it'll actually turn into something productive or is it, like I mean, it.
Will be The issue Really the issue really is at this point that to actually do something with the federal government money takes a long time. Yeah. Now, whether they can shorten the time, that's very important, But it's more of a time issue, i think at this point than a competence issue.
Well on the grid thing, which it sounds like is sort of two questions, Like you said, it's like the big thing, how many years? And then there's more need to happen on the sort of regulatory side, because this came up with in the recent dead saling negotiations permitting, like can you actually like put up the wires, et cetera. Like are you watching for more action on the regulatory side for this thesis to really play out?
I mean, I am, I mean the problem is that and I don't say this pejoratively at all, but you know, people have who have a very environmental bet bent, bet bent. I don't want any non solo to be built, you know, so, but the problem is that, you know, to get from here to there, you're going to need a bridge, so they fight any permitting, you know. But the problem is you can't wave a magic wand and electrify every single car in the United States. So that's a real problem.
I don't know how to solve that other than you know, this administration has to really push through you know, shorter permitting.
I know, we can keep going, but maybe we should leave it there and encourage the.
Audience members do not ask a question about crypto.
Come on, you know, it's funny. So there there No, that's great, that's great. Someone put a question in there about cryptos, like really, okay, but please what is the give us a take?
Okay? So so as I like to say, not that I feel that strongly about it. So there are two issues about crypto. Is it actually a currency? And number two, what's it good for? So personally I have my doubts that it's even a currency, But let's push that aside. What's it good for? So one thing we know for certain what it's good for is money laundering. That we know for certain. Is it good for anything else other
than money laundering? So at this point it is certainly not good for transactions in the real world because the cost of it is just way too high. Now, the people who argue that one day, you know, one day it'll be cheap enough to do, I have my doubts because do you know how much money goes over the rails of Visa MasterCard per year? It's like two trillion. You know how much Visa MasterCard charge per transaction ten
basis points. So I think, assuming that you know these coins have are really exist in terms of the real world, it's going to take a very very long time for them to be enough volume for them to be cost efficient. Until then, it's mostly going to be about money laundering, So what else is it good for? So people keep coming up with new theories, so obviously it's not good for transactions. So then the thesis was that it's a
way to hedge against the debasement of fear currency. So the problem with that thesis was and still is that if that's the case, then bitcoin should go up while everybody's freaking out about the stock market and freaking out about inflation, and Nasdaq is down and people are freaking out about the stock market, and that's how bitcoin acts.
It goes up. The car I actually calculated is the correlation over the last several years of boitcoin and naasaka is anywhere from forty to sixty five percent, depending upon what time period you're talking about, So that thesis can't be true. So bitcoin in that sense is just another warm form of speculation. The latest thesis that I heard, because you know, people don't give up, is it's a form of what's the word store of value. I knew it would come to me event I was having a
data retrieval problem a store of value. I heard that this from a bunch of people. It's a great store of value. And my response to that is.
Right, this was the anti bank thing, right, And I go about that.
Really, is it really a store of value? How could it be a store of value when it goes up and down like a yo yo every single year. You know, currencies don't do that. You know, people who trade currents, you know, a ten percent move in a currency like the dollar any year is extraordinary. So people who trade currency, the only way you can make money, generally is to lever yourself enormously. You can't have a currency that's a store of value that goes from twenty thousand to fifty
thousand to twenty thousand to twenty five thousand. You know, in between, you're going to the bathroom and coming back. So I don't understand, honestly, somebody should tell me, because I just don't understand the social utility of bitcoin again, other than money wandering. For that, it's excellent.
I'm guessing more about to get swarmed by at least a few cryptobias.
Yeah, now, come on, we'll have a nice fistfight. It's okay, great, all.
Right, Well on that happy note.
Just leave it there, all right, very much thought.
Well.
That was our live episode with Steve Eisman, recorded as part of the Bloomberg invest Conference. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway.
And I'm Joe Wisenthal. You can follow me on Twitter at the Stalwart. Follow our guest Steve Eisman on Twitter. I didn't even realize he had been on there. He's at Eisman Stephen. Follow our producers Carmen Rodriguez at Carmen Arman and dash Ol Bennett at dashbot. And check out all of our podcasts at Bloomberg under the handle at podcasts. And for more Oddlots content, go to Bloomberg dot com
slash odlot, where we post transcripts. We have a blog and weekly newsletter, and you can chat with fellow listeners twenty four seven in our discord discord dot gg slash odlot. It's a lot of fun.
Go there, check it out.
Thanks for listening in behead