Odd Lots - Steve Eisman on the 'Paradigm Shift' Happening in Markets Right Now

Episode Date: February 6, 2023

After a decade of dominance, 2022 saw tech stocks badly underperform the rest of the market. However, so far in 2023, tech stocks and other speculations have surged again. According to Steve Eisman, what we're seeing is the natural process by which a "paradigm shift" is playing out in stocks. Eisman, a portfolio manager at Neuberger Berman, won big betting against CDOs during the Great Financial Crisis and was famously depicted in the book and movie The Big Short as one of the few investors who got it right. In this conversation, he talks about lessons learned from his career in investing, how and why big shifts happen in markets, the state of the financial system, and what sectors could win over the next decade.See omnystudio.com/listener for privacy information.

Thanks for listening to OddLots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, Odd Thoughts on Amazon Music. And welcome to another episode of the Odd Thoughts podcast. I'm Tracy Alloway. And I'm Joe Wisenthall. Joe, it feels like an interesting moment in markets. Yes. I mean, there's the sort of short-term, obvious stuff that's interesting. Like, oh, what's going to happen with the soft landing or what's going to happen with the Fed, etc. But it also feels like a pretty big turning point in markets overall. Absolutely.

Well, to me, it feels like kind of a massive flip-flop from Doom and Gloom 2022, where it kind of felt like everyone was talking about the world was actually ending. And suddenly, you know, fast forward to just the beginning of 2023. And everyone's talking about a soft landing. Maybe the recession is averted. Markets are up quite remarkably, including things that got absolutely crushed last year. So some of the big tech stocks, Bitcoin, I mean, some of the Chinese companies like real estate and consumer tech companies, all of those are surging. Right.

So like there's this hope, right, that we, let's just go back to 2019 or let's just go back to 2019. or let's just go back to 2021. Like, let's just hang on. And it's sort of this thing because, you know, when I think of 2021 or when I think of like 2019, it was sort of like the ultimate speculative froth, low interest rate environment. And as everyone's tired of hearing me say, like on this podcast, like, you know, I, you know, I first got interested in markets at the end of the dot com. Here it comes, folks.

No, but I remember like those periods where it's like, you know, you have like you look at the NASDAQ in 2000. or 2000 and you have like these like 50% rallies. It's like, oh, we're back. Oh, no, it's over. We're back. It's over. And that process of like, I guess a bubble deflating is like a long process. People are slow to give it up. Well, that's exactly it. And it sort of happens in fits and starts. And I'm glad you mentioned the keywords there, which are bubble and, you know, speculation, speculative interest. Because today, we are going to be talking to someone who is kind of an expert in exactly that and particularly one period of speculative financial history. We are going to be speaking with Steve Isman.

He is a portfolio manager at Newberger Berman, and he famously bet against subprime mortgages before the 2008 financial crisis. Of course, you might recognize him from the movie The Big Short. He was played by Steve Carell. So really, the perfect guest to talk about markets right now. Perfect.

Let's do it. All right, Steve, thank you so much for joining us. Thanks for having me. So where should we start? Maybe give us just your talk. top line opinions on where markets are right now? There's going to be a long intro. Okay, that's fine. That's fine.

People are going to enjoy listening to. So I remember back in college, one of the most influential books I read was a book by Thomas Kuhn called The Structure of Scientific Revolutions. He invented the modern meaning of the word paradigm. And the point of the book was that science paradigms change over time. sometimes those paradigms change violently, and sometimes those paradigms change over time, because people don't give up their paradigms easily. And I think we're going through a period possibly like that again.

So, you know, markets have long periods of paradigms where there are certain groups that are leaders. So in the 90s, for example, it was largely, I'd call it large conglomerates like, GE was what people made money in and wanted to invest in. And it lasted about eight years until there was a small period of the dot-com bubble. And obviously that ended and there was a recession. And after that, really through 2007, the new paradigm, and just to take a step back, when, you know, when market paradigm shift, it's unusual that the old leaders become the new leaders. There's a shift and there's a new leadership group. And, you know, one of the most important leadership groups,

I'd call it from 2002 through the end of 2007, were financials, you know, largely investment banks, very large banks, where the opinion of the market was the people who ran these firms were basically geniuses until they weren't. And, you know, we had a violent period in 2008 and 2009 where those stocks got crushed, almost all that. them would have gone bankrupt unless the government bailed them out, which it did. But, you know, financial stocks that did well in the 2000s did literally nothing until probably 2020. So call it a

dozen years where the old leadership group evaporated. And it was replaced by a new leadership group. And that leadership group was tech and growth stocks. And I think the reason for that is that the Fed cut rates essentially to zero and kept them there. And so you were essentially paid to take risk. And as we all know, there's a discounting mechanism of stocks where, you know, you plot out the earnings and the lower the discount rate, the more the stock is worth. So the group that did best were growth tech stocks. And within growth tech stocks, the group that did the best were the high growth, no earnings stocks. And that basically lasted until last year. And if you look, you know, it was a bad market last year, but the stocks that did the worse were the growth

tech stocks. And within the growth tech stocks, the stocks that did the worst were the high growth, no earning stocks, down generally anywhere from 70 to 90%. You know, it's a crushing percentage. But like I said, you know, people don't give up paradigms easily. And so far this year, the stocks that have done best were the same stocks that did the worst. And, you know, know, if you go back to 2009 through early 2010, financial stocks had their last hurrah. You know, Goldman, Morgan Stanley had said it did very, very well until, you know, Dodd-Frank was passed and they had to deliver. So they kind of had a last hurrah. And maybe this is the last hurrah right now for growth stocks, possibly. And I think it'll all depend pretty much on the Fed.

You know, Powell has said that he's going to keep raising rate. and the important sentence is, and he'll leave them there. If he leaves them there, I think we'll have a paradigm shift. If he cuts it again, we'll go back to what we were, which is growth stocks. I mean, I think he's going to leave him there, and then we'll have a paradigm shift, but it's unknowable at this point. You know, like I said, paradigm shifts can be very violent. They take time.

I think we're in the middle of that right now. And like I said, it's unusual when you shift to new paradigm that the old become the new leaders. What the new leaders will be assuming this happens at this point, I don't really know. You know, Joe, I'm looking at the bubble portfolio, which was created by another odd lot of thoughts, Paul McNamara, and basically has a lot of the stocks that Steve was just talking about up 20% so far this year. Tracy, who's created by Paul and me? Oh, I'm sorry. I co-created that portfolio of bubbly. By the way, some of those stocks are up 50 to 60% in January. It's astonishing.

Now, they're up 50 to 60% from very low levels. You know, take, I'm not picking on them. Take a stock like a firm, which is a buy now, pay later company, really a financial company. I think it's up 60% this year. But it's up 60% this year after being down basically 90%. So I think it closed last year around 8 and it's 15, but it used to be, I don't remember, 100, 200, whatever it was.

Yeah, another one of these ones that I've been watching is an open door, which got below a dollar at the end of December, now at 227, so like more than a double. But that was like a $12. I mean, that was a spec. So it was like incredible beat down and then this sort of bounce. What is that process? You know, you talk about this sort of like the giving up the dreams and the process by which people aren't sure, is it over? Is it not over? We don't want to change the paradigm.

Just in the sort of like how to talk a little bit more about like how that has. happens, how that process works? Well, it takes time. You know, I would recommend everybody read this Thomas Cune book. It was published the year I was born, 1962, which is, I guess, revelatory for me. But what he describes is, like I said, people don't give up their paradigms easily. When Einstein created his theory of relativity, for example, this isn't the book. It's not like everybody said, oh, we've been waiting for Einstein.

Thank God. now we can get rid of Newton, you know, people, it took several years for people to realize that that was a better theory. I think something like that happens in markets. You know, paradigms, in essence, are so deeply ingrained in people's brains. They can't even imagine at times that there could be anything else. And so like I said, since paradigms, people don't give up their paradigms easily, the only thing that gets people to give them up is time. Now, the financial stocks, that was quick because they utterly collapsed. But that's unusual.

It's not like in the 90s, the conglomerates collapsed. They didn't collapse. Their earnings growth slowed. And, you know, people expected the earnings growth to reaccelerate, and it didn't. So, you know, take GE. You know, GE was a star for almost. almost all the 90s. And then when Imel took over just before 9-11, it's deteriorated. You know, probably one of the best trades in the world would have been owning Amazon and shorting

GE. Right. You know, it's funny, Tracy, I actually mentioned Open Door. I got it kind of wrong. I said it was at 12. No, it was a $35 stock that went to a dollar. So I was sort of understanding the scale of the collapse. But more importantly, to Steve. Yeah, let's talk about Open Door for a second. Oh, great. Let's get right into it. So Open Door had a business model where they would buy homes, fix them up, and try to sell them quickly. Now, when you think about it, that business model only works if housing prices are going up. If housing prices are going down, it's a disaster. So I never thought it was a real business model.

It was a timing model. And I think the reason why the stock got crushed last year is because, I mean, housing hasn't collapsed in the United States, but it's kind of locked. And housing prices have gone down. So, A, it's hard to sell. And B, you're selling for less. And that's why open doors down so much. But, you know, when it came out, it was another one of these speculative going to conquer the world stocks until it wasn't. I definitely want to talk more to you about housing and real estate in a second.

but just on the paradigm shift. You know, when I think about the paradigm of the past couple years, you mentioned low interest rates and that helping to boost valuations. But I also think about momentum and people just identifying the thing that they think other people are going to buy and then pouring into that. And so having a lot of valuations driven by flows. Can you talk about that behavior in the market? I call this what I call this the Amazon disease.

I'm not saying Amazon's a bad company. It's a great company. What I mean by the Amazon disease is, you know, when Amazon came public, there was a lot of skepticism that this would work. And Amazon has basically conquered the world. And so people are always looking for the next Amazon. And you know that they're looking for the next Amazon when they just, when they write, when the cell side writes a research report.

And the first sentence is the Tam is huge. which means the total available market is huge. Well, you know, take Open Door again. Housing is huge. I mean, there's no question that housing is huge. But that doesn't mean people's business models are going to conquer housing. But people are constantly, you know, again, when rates are zero, you're paid to speculate. So you look at Open Door and you say, well, the housing market in the United States is, I don't know, a trillion, whatever it is, a trillion, two trillion.

If Open Door only gets 1% of that market, the stock is huge. And as long as revenue growth is strong, people are willing to make that bet. When revenue growth starts to slow, they don't think about the TAM anymore. They start to think about the business model. So, you know, in the 2010 beginning of 2022, if you were a company, that had no earnings, but strong revenue growth, people dream the dream. When the revenue growth slows, people stop dreaming the dream. Or a combination of that with higher rates and the discounting mechanism takes down the stock. You know, even companies that did well last year went down because of the discounting

mechanism. So let's say we are at this paradigm shift, and we don't know what it's going to be. We don't know it's going to look like, but something that's not speculative tech will be the new leadership, presumably, for a while. As an investor, like, do you feel like you can wait and sort of see what it is and like let the market kind of decide, or do you feel like an impulse to try to anticipate today what that thing is going to? I think you anticipate a little bit. So, for example, I think one of the themes for the next several years is what I would call the reshure. shoring of the industrial world back into the United States. So, you know, for the last, call it 30 years, companies have essentially sent their supply lines out to the inside the United States because

labor in the United States is expensive and labor in China and Vietnam is cheap. And that worked for a very long time and it was very deflationary. And COVID proved one thing. Yes, that's supply chain is less expensive, but it's also very brittle. And because of what happened during COVID, companies are bringing back the supply chain, at least partially back to the United States. So, you know, stocks that haven't done anything in 20 years, let's say, might start to do well, like BHP, iron ore, et cetera. That's one theme that I think will last a long time. Greenification, I think will last a long time, although some of those stocks have no earnings and high revenue growth.

I never quite know what to make of them. But there are other ways to play the same theme. You know, there are companies, I won't mention any names, but there are companies that are, let's call them normal, that are helping rebuild the infrastructure of the United States and the electrification of the United States, et cetera. So those are things you could start to look at. So that's actually something that we've spoken quite a lot about on Oblots, this idea of a sort of shift from, I guess, effemurate tech software to the reality of actual things. This might be a slightly weird question, but do you think investors are well positioned or well informed to grasp that shift? Because I imagine there must be a fundamental difference between looking at a tech company versus, say, I don't know, an oil or something like that.

Oh, I don't think people are prepared yet. You know, they've owned tech stocks for so long. You know, they look at revenue growth, they look at EVD, but da. You know, one of the things that I find astonishing, for example, about tech stocks is they don't include stock-based compensation and earnings, which I just find a little weird. And because I would always ask, do you deduct stock-based comp from your taxes? and the answer to that is always, yeah. So in that sense, it's real.

But when they report earnings, they pretend it's not real. But the market doesn't seem to care. But I think it's going to take time. Like we talked about before, some of these very speculative stocks are up 40 to 60 percent this year. It's going to take time for people to start to do, I think, research on other stuff. I know you weren't investing yet at this point, but, you know, as a student of market history,

was there the same process, like with the, like, earlier tech bubbles, like in the 60s, with the aerospace stocks and some of those other waves? I mean, I was in great school in the 60s. That's what I'm saying. No, I figured, but I... Although the two of you, I don't think were alive back then. You know, I think if you look at economic history, probably it's true. I haven't really looked at it that much. But, you know, in the late 70s, the group that people wanted to own were oil stocks.

Oil stocks haven't done well for God knows how many years until basically the last two. Now, let's talk about oil stocks for a second, you know, pipeline stocks, oil stocks. You know, why did they do so poorly? This is not a paradigm shift. This is a shareholder's revolt issue. So, you know, if you look back, call it 2010 through maybe 2018 or so. And this is where I would say incentives trump ethics. fix every time. So the people who ran these companies, whether it was the midstream pipelines or

the drillers, the CEOs of those companies were all compensated essentially on volume. So it didn't matter whether oil prices were 30 or whether all prices were 80. They kept growing their production. And in most cases, they basically never made money, whether oil prices were 30 or oil prices were 80. And at some point, probably around 2016, when the group got crushed, I think that the shareholders literally revolted. And they went to these managements and said, enough. And you have to change your compensation to ROE, et cetera. And the stocks have done pretty well since then, especially in the last two years, because

the way they operate now is they basically plan their business models for oil prices as something like 50 to 60. and if oil prices are above, they return the money to shareholders, which is one of the reasons why, despite the fact that all prices were so high last year, those same companies did not increase their production that much. Now, some people accuse the Biden administration of this. I don't think it has anything to do with the Biden administration. It has to do with the change in incentive structure for these companies. Incentives trumping ethics is such a good line, and I'm definitely going to steal it

from you at some point, Steve. You can plagiarize. You don't even have to quote me. Thank you. I appreciate that. I have a full license on that line. You know, given your background, I think we would be remiss to not talk a little bit about financial risk and financial stability. And this is something that has come up over the past year with the Fed raising interest rates so rapidly. And yet we haven't actually seen a significant break. Is the system fixed? Is it just not going to come that big breakage that, you know, some people have been anticipating for a while? Well, I can't say that there won't be breakage anywhere. I mean, there always could be breakage.

What I would say definitively is that there will not be breakage in the U.S. financial system, especially in the banks. We can owe that to one person, which is Daniel Turullo, who was the first vice chairman in charge of financial supervision at the Fed. which was a position that was created only from Dodd-Frank. And he was given the job. Although, it's funny, he was never actually officially appointed to the job because he'd have to testify in front of the Senate.

It would have been difficult. But he was essentially given the job anyway. And he really took the banks. He was very harsh. What he did to them, the banks objected to literally kicking and screaming. but today they'd probably all thank him. There are two things that he did. He reduced leverage in the banks enormously,

and even within that leverage, he made them cut off the tails of risk. So just to give you an example, a city group before the crisis, if you included all the off-balance sheet stuff that eventually came back on balance sheet, it was probably levered anywhere from 35 to 40 to 1.

And by the time he was done, it was levered 10 to 1. Now, for listeners, that may not mean that much, you know, 40 to 10, you know, those are just numbers. But the way I would describe it is when you're levered 40 to 1, to destroy the bank, you need a pebble. But when the bank is levered 10 to 1, you need a meteor. So now, we could have worse credit in the United States, although that really hasn't happened yet. So under those circumstances, the banks would earn less.

But I would say other than a couple of banks, not one bank in the United States will lose money. I seem to remember, weren't you one of the few people that read all of Dodd-Frank from, like, front to back? I think it was 2,000 pages or something like that. That's not true. That's a myth. Oh, okay. You were talking about financial stability, but, you know, we also touched on real estate earlier.

And again, you know, you sort of characterized the housing market. It's kind of in a freeze. Maybe it's already stabilized a little bit. But with rates having shot up so much, I mean, like, how are you thinking about, like, housing and where it's going to go? And can, like, can it stabilize with such a repricing of mortgages in a short period of time? I mean, sure, it can reprise. It takes time.

I did a small calculation when mortgage rates got to seven, which was if you calculated the monthly payment of someone who bought a home with a 3% mortgage versus someone who wants to buy the same home at the same price with the same mortgage at 7%. For that person to have the same monthly payment as the person with a 3% mortgage, the price of the house has to go down from like 35 to 40 percent. Now, as long as people are employed, they're not going to sell their home down 40 percent. They'll just live in their home. So housing prices have come down some, but it's still the case, I think, that the housing market is locked.

Let's say you have a small home, you got a couple of kids now. So you want to sell your house and you want to buy a larger house. You can't. You're stuck. So you buy bunk beds. My kids have a bunk bed. Well, it's nothing wrong with that. But not only is housing locked, you know, building suppliers have, you know, less ability to sell their products because housing is not turning over. So that would be a short area, but I'm not going to give you any names. So this is actually something that I've been thinking about a little bit, which is house prices are sort of being supported.

illiquidity at the moment, right? And I don't think they're supported by illiquidity. I think they're being supported by employment. You know, like I said, if you're, you have a 3% mortgage, so your monthly payment is very, very low, you have a job, you don't have to sell your house. You're just not going to sell it down a lot. So you just sit there and hope that eventually people will get used to a 7% mortgage and you can sell your home.

But that could take a long time. That's fair. What I was going to ask about is recent events that we've seen with the real estate investment trusts. And we're recording this on February 1st. Blackstone just announced that it hit a monthly redemption limit. Is there going to be... What was the number, did they say? Five billion. Five billion, yeah. Okay, that was in line with people's expectations, I think. It's not a great number. And they have gates. Yeah. So I forget what the number is, but you can't withdraw $5 billion in a month. It's probably, I don't know, $500 million, something like that, maybe $250 million.

So, you know, they have gates. This is kind of where I was going with the liquidity point, right? I mean, you know, let's just talk about the Blackstone, you know, private reet. So I'm not being critical of Blackstone, but when you think about the structure of that reet, it has what I'd call an asset liability mismatch, meaning you're investing in real estate. Those investments could be good, but they're illiquid. So it's not like you can sell a building overnight, but your liabilities, meaning your investors, can withdraw money every single month.

So if the withdrawals get too bad, you can have to sell some of your real estate. Now, Blackstone has a very good reputation, so it might be fine. But I think what happened last year with that, it's called the B-Reed, is that about 20% of the B-Reed's investors were from Asia. and those Asian investors got from some investment banks enormous leverage to invest. And given what the markets did last year, they got margin calls and they had to, you know, withdraw money from Blackstone to pay off their margin calls. Now, how much more that's going to take place in the next several months?

I have no idea. So we talk about how investors leave the old paradigm kicking and screaming. But I'm thinking also about like scars from the past. And I feel like people listen and they hear like, oh, there's some of liquid fund and there's a margin call. And there's this real people yanking their money out and they're like, they reach for the 2007 playbook in their minds of the 2008. To what degree do you think memories of that crisis are still informing how investors think about and try to assess the market today? Oh, I think 2000 and 2008 for some investors is like PTSD. Look, financials are complicated.

there aren't a lot of people on planet Earth who really understand how much the financial structure of the United States and Europe has really changed. So they see the markets go down and they say to themselves, oh my God, something bad is going to happen. Now, something bad could happen. You know, we could have a recession, but my feeling is we'll have an old-fashioned run-of-the-mill recession. We're not going to have some enormous, you know, meltdown crisis where the system

is completely at risk, which is what happened in 08. Before you forget, I mean, you use the pebble versus meteor analogy. Can you just explain, like, what is it about the nature of U.S. banks now? You say they cannot lose money anymore. Well, you're 11 to 1. You know, what happened in the financial crisis, one of the things that's very important and getting back to my line, which I've donated to you, incentives, Trump ethics every time, is there's a concept called risk-weighted assets

where the system, you know, the regulatory system tried to merge the concept of leverage with risk. And so every asset on the balance sheet got a risk-weight. And so when regulators and companies calculated leverage, it wasn't assets divided by equity, it was risk-weighted assets divided by equity. So if you look at Europe, for example,

where the banks are much more unit, form from 2007, I'm sorry, from 1997 through 2007, absolute leverage in the banks in Europe went up three times. But on a risk-weighted asset basis, they were flat. So a lot of the executives who ran these companies, when they looked at their balance sheet, they said, oh, our leverage is the same when in actuality was much higher. And they had a lot of risk on their balance sheets. They had a lot of subprime assets of various kinds, which all blew up in their face. And because they were levered so much, they essentially died. The only reason why they survived because they were bailed out.

So today, not only is the absolute leverage lower, like I said, city has gone from 35 to 40 times to 1 to 10, maybe today it's 12. but the type of risk that they take, generally speaking, is far, far lower because the regulators who essentially live in these banks are not allowing them to take enormous types of risk in their loan books. So look, the system, like I said, is probably safe for the first time in my lifetime in that sense, but I don't think a lot of people really understand that that's the case. You know, you mentioned investors getting PTSD from 2008 and it's sort of informing and affecting their subsequent behavior. And I don't think you got PTSD because you made a lot of money out of it. But it was a defining moment of your career. How did you yourself move past that particular era? And what I mean by that is there are people out there who made a lot of money in 2008 who subsequently every year have been issuing warning.

about how the entire market is going to fall apart, the financial system is going to collapse. How did you move past that? Great question. A lot of therapy. No, no. The way I got past it was, well, I actually got friendly with Daniel Turullo.

So I watched what he did very, very closely. And, you know, I realized that what he'd accomplished was actually astonishing. And so the system, you know, was fun. What I didn't anticipate until years later was that because the Fed cut rates, you were paid to take so much risk. What you wanted to do was buy companies with no earnings. That was much harder to make that shift. But I didn't think that the financial system was going to go down again.

Yeah, it really is extraordinary. Like how, I mean, you see it still, you know, like, what was it, Credit Suisse a few months ago? Like, people are just not able to get past this sort of, like, yeah, great financial. I wasn't going to name any names, Joe. No, but it was just like people were like, it was in the headlines and stuff. And, you know, people just like reach for those old analogies. So just looking back at your career, you know, your very long and illustrious career. But what was most...

You flatter me. What was your most shocking moment? Like, what surprised you the most, whether it was a company that, you know, failed or maybe succeeded or a particular behavior by someone or an entity? to you? Well, what surprised me the most was what happened in 08. I thought that surely the regulators knew what I knew. How could they not? Because they had much more information than I did. And it became very, very clear as 08 went on that they didn't really understand what was going on until it was too late. You know, I remember Bernanke made a speech.

He said something like subprime mortgage risk is confined. And I turned to one of my colleagues and I said, yeah, it's confined all right. It's confined to planet Earth. That's funny, by the way. Sorry. Pay attention. I'm laughing internally. So, you know, when you read,

I forget the book by, but it was a book, there was a very early book about the financial crisis. And there was a scene where it was the weekend when Lehman went down. And there was a scene described in the book where as Lehman is going down, they know what's going down, someone walks into the room. I mean, I'm just paraphrasing. Yeah. And basically says AIG is also. also in trouble. And I'm thinking, this is a shock to you a lot. Like, don't you read the research? I mean, I couldn't believe it. But that was the most shocking thing in my career. I could not believe

that the regulators and the government really had no idea what was going on. Can you talk a little bit more about, like, okay, to make any real money in the market, there must be some sustained periods where you have a different view than the overall. I don't think that's necessarily true. Okay. You know, 06, 07, 08, I had a very different view. Yeah. Is that hard?

Oh, my God, it's ridiculously hard. The whole world is telling you that you're an idiot. And then sometimes you think you're an idiot. So that's hard. Well, because, I mean, I've, you know, I've been thinking about that too, like a lot of people, for example. And I don't want to, like, actually dive into this specific thing. But a lot of people, for example, like, had to deal with their. this of the last year related to like cryptocurrencies.

We're like everyone's calling them an idiot for like not really getting it. And then maybe they're right. But that process of like being called an idiot, maybe underperforming or missing some market move for years and being told like, you fool, don't you see what's happening? It seems like psychologically a huge challenge. You mentioned therapy earlier, Steve. This is where if I had a therapist, I would talk about abuse from Bitcoiners. Well, let's talk about Bitcoin for a second.

I mean, getting back to do you have to be different? Yeah. Now, from 2010 through 2020, if you objected to high growth stocks with no earnings and you were short them, you'd basically be dead. Yeah. So that can last a long time, even though you have a different opinion. You have to have pretty good timing to deal with that. But let's talk about Bitcoin. Okay, sure.

Because that's a great fun topic. Okay, fine. So I remember during COVID, you know, I was out on Long Island and the North Fork, basically living there. And I would come back to the city every Tuesday to visit my mother. And so I would drive to the city. There would be no traffic. And it would take me about two hours.

So I listened to podcasts. What else are you going to do? I even listen to this podcast every now and now. Oh, thank you. And, but one of the group of podcasts that I listened to were the so-called expert on Bitcoin. And there are always two questions that I had. Number one, why is Bitcoin a currency? And number two, okay, it's a currency, but how should it trade? Now, on every single podcast, they completely skipped over the why is it a currency issue. It was like that was just a given.

And that's not a given to me. We can get back to that, but it was a given. The second part, of the story about how should Bitcoin act, they all had the same opinion, which was fear currency, which is government-issued currency, has been terribly debased because of all the deficits that all these countries have issued. But it's very hard to short fear currency because they all trade relative to one another. So if you short the dollar, your problem is that in a basketball team where everybody's 5-4, the dollar is 511. So it's hard to short the dollar because it's taller than the other currencies, even though, quote-unquote, it's been debased.

So therefore, you should buy Bitcoin as a hedge against the debasement of all currencies. Okay, so let's accept that theory for a second. If that's the case, then Bitcoin should go up when people are nervous and raise, rates are going up and Bitcoin should go down when rates are going down and everybody feels good. And the problem was it actually did the opposite. It would go up with everything else speculative and it would go down with everything else speculative. So what was the point? So, you know, Bitcoin is up a lot this year because it's up a lot with everything else speculative.

Now, you can't have a currency that moves 25% percent. every six months. That's not a currency. That's a speculation. And the thing I don't understand about Bitcoin is what problem is it solving? You know, is there a problem with currencies? I mean, the last time you went to the store and you pulled out a $20 bill or you paid with your credit card, did the store owner say, no, I don't take dollars? I mean, it's not even an issue. And by the way, the currency markets are the most liquid markets in the world. You know, I like, like to say, how long does it take to buy dollar euro? Done. A billion dollars done. That's how quickly it is. So I don't understand what Bitcoin solves. And I don't understand the purpose of

owning it other than it's another form of speculation. So I just don't get it. So you mentioned speculation and COVID. And I mean, this was something that played into a lot of the cryptocurrency boom, this idea that, you know, people are stuck at home, they're bored. Maybe they got some extra money thanks to the U.S. government and they're using it to trade. When you look at consumers now, and I know at various points in time, you've had positions in subprime auto lending and some consumer facing things like that. But how would you characterize the U.S. consumer? Because this is also something that comes up as people talk about a potential recession in 2023. So let's just say that over the last several years, credit quality on the consumer side in the United States, the delinquencies and losses got so low.

They've been lower than any time basically in history. So do I think there's going to be a normalization of delinquencies and losses? I mean, I think that Jamie Diamond said that on the most. recent conference call of J.P. Morgan, but you really haven't seen it yet. So consumer's still in pretty good shape. You know, as long as everybody's got a job, people will pay off their debts. So it's really a question of unemployment. If unemployment goes up, you'll see an increase in delinquencies and losses, but it's not going to be a calamity. It's just going to be what I'd call a normalization. So what are you sort of looking for next? I mean, you mentioned at the beginning of the conversation,

And there's still some ambiguity as like, oh, is the Fed, you know, later in the year going to start cutting? Will this revive the growth stocks? What are the other signs that you would look for either like, yes, the paradigm shift is here and happening and or this is the sector that really is going to define the next decade? And do these things like, is it reasonable to say they kind of go by decades? Like if a new paradigm emerges, is there like a 10 years? Well, there's no reason to say they go by decades. It just happens to be historically true that they do. Right.

Why that's so? I don't know, but it just happens to be the case. You know, unfortunately, over the last couple of years, the only thing that's mattered in the markets is one variable. What's Powell going to do? And how much is he going to do? There's been very little, what I call, dispersion within sectors.

So, you know, one group, you know, let's call it textile. goes up, they all go up. And this is because of ETFs. Oil stocks go up. They all go up. There's no, there's not much of dispersion within groups. And that's because everybody's so focused on rates. I think the key moment will be, you know, obviously the Fed at some point will stop. When that is, I don't know. The operative question at that point is, will the Fed keep rates there or will they cut. The market is completely convinced that they will cut despite the fact that Powell says at every press conference, we're going to leave it there. So either you take him at his word or you don't, and we won't know until that happens. You mentioned ETFs changing the nature of how stocks trade

and the sectoral, internal sectoral correlations. Is that here for good? Oh, definitely. So that's I mean, I'll give you an example. There are lots of different ETFs or algorithms. I'll give you two stocks. And I'm not being critical of them, but I'm just going to give you an example of it. So you have a firm, which we discuss, which is buy now, pay later, which is call it a quasi-financial payment stock. And then there's another stock which I'm very familiar with called Chupanion, which is a company that does animal health insurance. Pet insurance. I think I might have, I think I, maybe at one point I had a policy from that. I had it too. I had it with them for a little while I have two dogs. So for a while, I used to have four. And so we used to use Trupanion for a while.

Now, when you think about it, what does a firm have to do with Trupanion? Nothing. I mean, one's in animal health insurance and one's in buy now, pay later. So the two stocks literally have no overlap in their businesses. They have nothing to do with another. They're in different sectors, et cetera. The only thing they have in common is that they were high revenue growth, negative earnings companies. And I think if you would watch the markets on a daily basis, the correlation between the two is very high because it's got to be in some kind of ETF and algorithm. The insurance are identical. But like I said, they have nothing to do with one another. But they trade together because somebody's got some algorithm or ETF where they're

both in there. ETFs and benchmarks turn the market into a giant blob. Steve, final question for you. what one piece of advice would you give investors and perhaps financial journalists as they go through this paradigm shift? That's a tough question. I actually don't know the answer to that. I just skepticism. You should always be skeptical about what management say. You should do your own homework. That's all I would say.

I don't have what I call a leaving question that everybody should ask. All right. Steve Eisman, wonderful having you on odd lots. Thank you so much for coming on. Thank you for having me. Thanks, Steve. That was great. So good.

So, Joe, I enjoyed that conversation so much. It was sort of wonderful to relive some of the drama of the 2008 financial crisis. But I did think the point about this idea that I think in 2022, everyone thought the Fed raising interest rates was such a big break in the market. And so there's a sense of whiplash as we kind of enter 2023. where we start to see some of the things that had the most excesses of 2020 and 2021 recover. It's confusing to everyone. But Steve's point about how, you know, this isn't a sort of one direction process and you can get these stops and starts in a paradigm shift. I think that was interesting.

Yeah. No, it really is like people give up the dream. It takes a long time. Right. Even like myself and I've never been like some like tech cheerleader. I don't think anyone accused me of. Even in myself, when I think about markets, like, wait, can, like, can you make money in other industries? Could there be a period in time in which these high, fast-growing Silicon Valley companies aren't the darlings of markets?

Like, even, you know, like, I never, like, wanted the Kool-Aid in the first place, but I still, like, it's hard to, like, you know, turn my head in a different direction. Well, and also, there's so much additional artifice, like, built on top of the tech industry at this point in time. Like, there's so much media and things. Like people talk about it so much. I just can't imagine such, you know, another industry like, I don't know, some boring conglomerate that like pulls things out of the ground, something like that, having the same excitement attached to it. I know. Like are people like, and even if like we do have another like, I'd say we have like a decade of oil and commodity boom. Like we're going to have like people on Twitter like doing big threads about like what it's like to work at, you know, pioneer or what it's like to work.

I just like don't see it. It's hard. Or getting excited about total market size, right? to Steve's Tam point. Anyway. Total market size of every car owner in the entire world. Yeah. So much good stuff. Also, just I thought, you know, the part about how much safer the financial system is and coming from what I would say is a very credible source on that topic. Yeah, it is something that we have been hearing repeatedly on the podcast. And every time I hear it, I do have that knee jerk 2008 PTSD reaction thinking, oh gosh, we're going to jinx it. But, you know, hopefully. We should get Dan Tarillo on the podcast. Yeah, yeah, I had the same thought. Do it. All right. Shall you leave it there? Let's leave it there.

This has been another episode of the OddLots podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. You can follow me on Twitter at The Stallwork. Follow our producers, Carmen Rodriguez at Carmen Armin and Dash 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.com slash oddlots where we post transcripts. Tracy and I write a blog, and we have a weekly newsletter that comes out every Friday, go there, and sign up. Thanks for listening.