Odd Lots - Steve Eisman on Banks, AI and His Next Big Bet

Episode Date: June 16, 2023

Steve Eisman is known for having bet against the housing market prior to the Great Financial Crisis in a trade immortalized by Michael Lewis in The Big Short. So what is he betting on now? In a special live episode of Odd Lots, recorded at the Bloomberg Invest summit, the Neuberger Berman portfolio manager discusses the recent banking turmoil (he thinks it's contained), the boom in anything related to AI, and his current bets on US manufacturing and infrastructure. He also talks about investing in rewiring the nation's electricity grid and why he thinks this theme has years left to play out.See omnystudio.com/listener for privacy information.

Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, analysts, analytics. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, analysts, lists and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing is subject to risk, Vanguard Marketing Corporation distributor. Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, All Thoughts on Amazon Music. Hello and welcome to another episode of the Oddlots podcast. I'm Tracy Allaway. And I'm Joe Wisenthal. 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. Really? Plenty. All right. Let's just jump right into it. 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 Newberger, 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 you also thought, I don't know if I would say okay. Okay. Well, all right, let's talk about what happened since then.

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 sum it 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 freaking line. So, pay attention. So, I mean, the saying goes, the 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 had one depositors with $150 billion 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 bonds. That was it. They made very few loans and gave great service. And so when rates were at the bottom, they bought 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 essentially wiped out their equity. But that's not enough because you could always hold the bonds to maturity, unless you've 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 75 to 90%.

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 ran out of liquidity. They sold their bonds. And the rest is history. You know, thank you, Peter Thiel for causing a panic. And the next morning, they were done.

That was essentially the story. So after that, everybody, you know, basically started shorting every single bank that had the same characteristics as Silicon Valley signature, which went that same weekend, First Republic, Pact 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 were 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 lurking on the bill. 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 dollar. But 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's no question.

There's absolutely no question. 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, 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 happened during the pandemic 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 25 basis points of money market funds is 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 treasury, you make 5.4%. That's not bad. So people are taking their money out of the bank and putting it to money market funds. So what's happening is the regional banks are really pulling in their horns in terms of lending. 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. 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 SBB is. The end of the hiking cycle. It broke. It's not big enough.

It just wasn't big enough. Not big enough. You know, as I always, I said a long time ago, when J.P. Morgan goes down, planet Earth burns. When, when Silicon Valley goes down, it's a match, you know, like a match, you know, pst. Well, okay. One more thing. more than a match, maybe a match book. One of those like automatic

provider things. One more banking question, but you mentioned... I might have one more banking question, too. Okay, full disclosure. You mentioned profitability there. Are financials a good buy 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. No, the problem is that because of the money leaving the banks into money market funds, it's more likely than not an estimate is 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. I'm not going to tell you. Okay, but they are known. Okay. I know almost all of them. Okay.

You know, these are the people who traffic in largely, you know, the financials for 20 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 SVB collapsed, 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, 15,000 or something like that.

It's more like 5,000. More like 5,000. Are we going to have, you know, in 10 years will we be down to 1,000? Like how much consolidation is coming? Really? No way. First of all, the regulators will not allow, JP Morgan buying First Republic is a one-off. The regulators do not want the large banks to get any bigger through M&A. You know, could there be mergers between regional banks? Sure. But to go down to from 5,000 to 1,000, I mean, that's a lot of work. You know, it's choose your poison. In Canada, the banks are safer because they're oligopolis, 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 your... I don't know if it's an expert, but okay. You have experience with moral hazard. What do you think about deposit insurance in the aftermath of SVB? I mean, the depositor's got a full bailout. There's now a 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 up 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 hazard 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 insurance level unless it's an emergency. I think it would require some sort of act of Congress. But regardless, good luck with that. Right. But sitting aside, 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 whole at 100 cents on the dollar. why is banking like a private for-profit enterprise as a thing if this sort of like key aspect of it? No, I agree with that. I mean, the problem is whenever 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 2008, that was true.

You know, with Silicon Valley really wasn't true, but on 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 12 months. Was there anything in the recent banking drama that reminded you of 2008? 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, 10%, 20%, 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 if there's a run on the bank. So this is more of a, I think, an examination issue

rather than liquidity issue and a capital issue. By examination, you mean the examiners of... The San Francisco examiner should have been all over Silicon Valley, you know, 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 financial system? 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 single VC fund and every single VC company to bank with one bank. That was, it 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, in the finance industry mafia, was this something, Is this something that comes up and would people aware of this? Or is this like, oh, where did this? No, they were aware of it. They were aware of that. They were aware of signature for this republic. I mean, it's just math. In terms of risks in the financial system now, do you 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 Republic's in trouble. Well, you know what? Credit Suisse 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, 2008, 2009, the reforms, Dodd-Frank, etc., put the regular, 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? What I think the regulators learned was that you have to be fast. So the fact that they guaranteed deposits over a weekend and seized two banks

was very important. So they did learn that lesson, but they weren't looking for liquidity duration problems. Should we talk markets? Wider markets? Oh my God, God forbid. Yeah. You know what? We should just throw out some single stocks

and just have you a fine on them. But why don't we start? Price targets. Invidia, because I think that's like the figurehead for a lot of what's going on. I'm not going to do buy-sell whole. Sure. No, that's fine.

Because my firm would shoot me. Word association. Word association. Yes. And I mean literally shoot me, okay? This tomorrow morning. So what do I think of Invidia? Let me tell you what I think about 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 1 or 2%. You know, in terms of what's happened so far, you know, Nvidia 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 that 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, ChatGPT. So the apps aren't there yet. So right now, you know, this story is just, it's just, and 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 and 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 Accenture or hurt Accenture? It's unknown. And we don't know yet who,

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. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top grade products, cross the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking

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But the market seems to, I believe, the market seems to be of the view that the incumbents, those eight companies, however many there are meta, alphabet, Nvidia, 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 that? I mean, you know, I'm not a fortune tell. 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 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, and where to give you an example of a group that used to be hot and it is not. The payment space. Okay. PayPal, square, et cetera, et cetera. 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 God, every five years like clockwork.

And two years later, they come back and they say, no. So other than Visa and 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 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 behemoths 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. That's possible. of reason. So obviously, you know, when you see a company like Nvidia trading at over 30x revenue, in fact, it's actually not trading at 30x revenue. It's trading, you know, after the most recent, you know, the stock went up 26%, but the earnings doubled. I think, you know, the PE got cut in half. So I don't remember where the

P.E. 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 on people. It's like, oh, dot com. This is Cisco. This is loose, you know, some microsystems. Just these like completely unreal. 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 mean, look, invidia is the pure play. Yeah. Then there's AMD. We'll see how well 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 going to be as much as Nvidia, obviously. 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 going to 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. That a lawyer would not read the citations. 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, let's just say it's not mission critical. 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 eventually take over the earth hedging your bets, Joe. I always say please and thank you. 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 were very 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? Well, 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 200 to 10 and you're at 14, yeah, it's up 40%, but so what? You know, the large cap mega companies, I think, are investable 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, they'd be a blackout immediately. So, you know, their companies 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-adjusted returns. You know, risk-adjusted returns have been out of favor because everybody just wants to invest in tech. I think the world's going to be, you know, if rates stay high, I think that's going to happen because I think Volker, it's Freudian slip. I think that Powell is petrified of doing what Volker did, which was stop raising rates, cut them a little bit, inflation sores, and he has to go to 17%.

So many different direct, actually, what do you mean? When you talk about risk-adjusted returns coming into Vogue, what does that mean specifically? Risk-adjusted returns means how much return are you generating given every unit of risk? There's mathematical ways to figure that out. I thought all investors. I thought that was like...

Are you kidding? People haven't focused on that in the last 10 years. You have been paid to take as much risk as possible. So that concept, which was invoked for a very long time, has been... People have just stopped paying attention to it. Wait, but it sounds a lot like value investing, right? No, it's not value investing. It's 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 Albuels? in your portfolio. Those are the concepts that I think are going to start to come back. You know, just as an example, you know, my partners and I, you know, we run separately managed accounts. Everybody's got a different risk 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. 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, in 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, what's also going to come back is catering to everybody's individual risk profile as opposed to just putting 50% of your money in tech. As we're, since we're talking about paradigm shifts, and you know, you mentioned Powell's fear of, you know, having to go into the teens 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 it's going to go. So I'm going to go to three and a half percent.

So we're going to go to four. Okay, we stopped SVB. That must have been the top. Oh, no, we're going to like pause in June. But it looks like we're going to hike in July. Does this process in your view have further to go in terms of like... I think 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, 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 fact. 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 2008. Oh, we definitely aren't. If you look at the hard data, the spending continues. So how are you thinking about that? Well, what 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 in consumer. credit or anything like that until people start losing their jobs. 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 credit. That doesn't mean the consumer is not going to pull in their horns. I mean, you're starting to see that in a lot of different retail companies.

I mean, I think everybody 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 any... They are. It's actually very, I mean, I mean, the first submit I was wrong about this.

You heard it here first. It's a rare admission from Steve. I'm 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 3% mortgage, it's hard to sell your house and buy something else if you want to trade up and get a 7% mortgage. But the home builders have been very good at, you know, cutting some of their prices,

their costs, incentivizing people for 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. I would have 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 CRE risks at the moment?

Well, I mean, there's a lot of different categories of CRE. Well, let's talk about cap rates first, for example. Leave aside fundamental. You bought something when rates were nothing and you paid a 3% 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 or 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? was, two billion. You should let me guess. I was going to say $3 billion, but yeah.

Maybe it's gone up a little, maybe it's 2.2. That's unbelievable when you think about it. So, you know, the market has really reprised the public entities, but the private entities really haven't marked down their portfolios there because nothing is trading. There's about $175 billion of office debt coming due this year and about $150 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 60%. Today, it's probably 100.

So, I mean, the issue is the refinancing, and I think it's going to be tough. So you mentioned the market isn't trading. Is this one of those situations where maybe illiquidity can be your friend if you don't? You don't have to mark it down because you don't have to sell anything. Right. Well, the problem for you is that when your debt comes due, 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 CRI? I mean, $3 billion, it does seem like, oh, you were talking about like the end of sort of like New York work as we know. I mean, 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 Brookfield. I mean, these are not small companies have given back the keys for some of their pretty good buildings because, you know, they know the 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 AAA 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 buildings that are like that, I think the rest are problematic. They say abs are made in the kitchen. Cool, but who has time for three hours of meal prep and a fridge full of Tupperware? That's why I started using Factor. Factor delivers fresh, never frozen, ready to eat meals that are dietitian designed for balanced science-back nutrition.

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Visit Don Valley North Lexus for interest rate reductions of up to 3% for lease and finance rates, resulting in lease rates as low as 0.9%. Plus delivery credits of up to $1,500, only until April 30th. Visit Don Valley Northlexis.com. 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 en masse or systemic.

What would be the catalyst for that actually happening and how likely is it? I actually don't think there's 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 auto lending. But whatever problems happen 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, etc. 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 what, how do you like allocate your time? Because it's, you know, I don't know this stuff in depth. What do I do all day? Is that what you're asking?

Yeah. How do you allocate your time to have like a solid feel for multiple sectors? Yeah. I have a cup of coffee. You put up. I iced. Okay. We're on the same page until this far.

I get into the office. I start to read all my emails. You know, I log into Bloomberg. Oh, thank you. And, you know, their companies are coming to Newberger. 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 my. That's my day. What peaks your interest, 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 Newberger won't shoot me tomorrow about. So we've owned a company for a while called Quanta.

We haven't 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 10, 11, 12 times earnings. But because all the stuff involving 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? Guantan. So, you know, that's going to take years to do.

But stuff like that is, you know, the infrastructure stuff in the United States is pretty pathetic. Now, I remember years ago, maybe like 12 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. Like, it's unbelievable. Then you get on the Van Wick and the Grand Central Parkway. And it's, I mean, it's just unbelievable. Yeah. 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's been going on? 12 years. Like, 12 years, I could have done it myself faster. Like, what's going on with that? LaGuardia isn't even connected to a subway. 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 U.S. infrastructure for a while. Provide insightful commentary on U.S. 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 there is a shortage of labor. This is a little bit of the revenge of the middle class. So, you know, the 2008 crisis destroyed the lower middle class and the middle class.

Here, the layoffs are in tech and Wall Street. The middle class is actually doing quite well. I mean, what would cause a real uptick in 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 labor shortages 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 1221, asked, what about

Apple, you know, in terms of a company with just incredible, like, moat in some way. Right. There's always talking to becoming a bank or cards 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 inroad in the credit card. business. The payments business, probably. Another question from AB1 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 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 Tarullo, 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 the for the private credit lenders. 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 reshoring, French, you know, as you talk about this new paradigm, partly maybe kicked off by a lot of the public investment being made for IRA and chips, et cetera. How are you thinking about that? What is, like, what do you see as sort of maybe the medium

term of some of these trends and different ways it could shake out. Well, I think general reshoring is going to take time. Yeah. You know, factories aren't built overnight. I still don't think there'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, like I said before, the biggest story is going to be the grid. The grid is absolutely crucial. I mean, the estimates of improving the grid in the United States are, you know, everybody's got a different estimate, but it's like 200 billion, 300 billion, fire. I mean, it's unbelievable numbers. That's going to, I think, 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 U.S. seems to, at least in recent years be quite bad at infrastructure? We haven't spent money on it in generations. I've noticed when was the last time, let me put you this way.

In the New York metropolitan area, every highway, every parkway, every bridge, every park was built by Robert Moses. You should all read the book by Robert Carr or Robert Moses. It's superb. That's the 30s, 40s. 50s and early 60s. That was the last time the United States really spent a ton of money on infrastructure.

Our infrastructure is just very, very old. But why, I mean, I guess my question is why. Yeah, why? Can we issue all this? I mean, I'm not president of the United States. Go ask the last several presidents why they 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 particularly equity. 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. U.S. consumer restart of student loan. Is that something on your radar or is that not big enough deal? He's rolling it for people who are listening. I mean, look, I will just tell you, you know, putting out my lawyer hat, Supreme Court's 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 should just throw it out, but they won't. A question from Nathan Tankus, he asks, it's an interesting one. Is there an index which you would prefer that more properly weights tech relative to the S&P? No comment. All right, I have another question that was put in there from Nathan. It was regarding SVB, you said the way that they ought to have dealt with it is let the bank fail and then guarantee all the bank. But how does that solve moral hazard?

Because then everyone else was like that. Because everybody would know that if the next bank, you know, eventually we'll take away the deposit insurance. Yeah. And if your bank fails, we won't guarantee you. Maybe we put another guarantee ball of deposit. So basically the guarantee deposit. You got to be diversified. I mean, I 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 50th in line. I didn't know that there were really people got in line. Oh, no, they got in line.

There are 50 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 anybody anybody. So the first guy in line starts screaming. And he says, I'll clean it up. He goes, I want my F and 50 F and frick-frikin million dollars. And she says, she says, sir, I just lost my job. And he starts screaming, I want my 50 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 it's in Teal's portfolio. You shouldn't say that because, Most of the people in this audience don't ever saw the movie. Okay. Resistance. People have seen it.

Okay. It's in that chat, GPT. Right. I have, 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 sector? If you want portfolio advice, I'll give you my card. You can come invest with me. Which sectors slash stocks are at most risk for a short-scor? squeeze in the next 12 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 these things. Someone asked 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, we know that there's money going into factories or structures booming. But then there's the question of like, okay, are we going to like do a good job? of it and with a lot of this green spending, with a lot of this reshort, like, are you confident that with the money there that like it'll actually turn into something productive or is it like I mean, some of it'll be a really productive. 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,

like is sort of two questions. Like you said it's like the big thing. How many years? And then does more need to happen on the sort of regulatory side? Because this came up with the recent debt selling 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 a, who have a very environmental, bet bent bent yeah not bet bent um don't want any non-solar 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 um so they fight any permitting you know but the problem is you can't wave a magic one 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.

How could you not ask a question about crypto? Come on. Oh, you know, it's funny. So there was a- Come on. No, that's great. That's great. Someone put a question in there about crypto. I was like, oh, do we really? Okay, but please, what is the, give us a take on crypto. This is so good.

I'm glad to you. So as I'd 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 and MasterCard per year? It's like $2 trillion. You know how much Visa and MasterCard charge per transaction? Ten basis points. So I think assuming that, you know, these coins have a really, exist in terms of the real world, it's going to take a very, very long time for there to be enough volume, for there 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 fee or currency. So the problem with that thesis was, and still is, that, that that if that's the case, then Bitcoin should go up when 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 not how Bitcoin acts. It goes up. I actually calculated this. The correlation over the last several years of Bitcoin and NASDAQ is anywhere from 40 to 65

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 form of speculation. The latest thesis that I heard because 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 about it. I was having a data retrieval problem. A store of value. I heard this from a bunch of people.

It's a great store of value. And my response to that is really? This is the anti-bank thing. Right. And I go, 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

currency, you know, a 10% move in a currency, like the dollar in a 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 20,000 to 50,000 to 20,000 to 25,000, 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 laundering. But that, it's excellent. I'm guessing you're about to get swarmed by at least a few crypto proponents who might be in the line.

Yeah, yeah, you know, come on, we'll have a nice fist fight. It's okay. Great. All right. Well, on that happy note, shall we leave it there? Let's leave it there. All right. This has been another episode of all thoughts.

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 Allaway. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. Follow our guest, Steve Isman on Twitter. I didn't even realize he had been on there. He's at Isman Steven.

Follow our producers, Carmen Rodriguez at Carmen Armin and Dashel Bennett at Dashbot. and check out all of our podcasts at Bloomberg under the handle at podcasts. And for more OddLOT content, go to Bloomberg.com slash oddlots, where we post transcripts. We have a blog and a weekly newsletter. And you can chat with fellow listeners 247 in our Discord. Discord.g.g slash oddlots. It's a lot of fun. Go there and check it out.

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