Steve Eisman from The Big Short | Ep. 031 Lemonade Stand 🍋

27:55Okay. The institutions now only report loans as modified... If... for the first 12 months they are paying modified. So I have a perfect chart here. This is impressive. Oh, no, so in other words, if you modify for the next 12 months, you classify it as modified, and then it goes back to non-mide. And then it goes back to, so for example, That's good. Aiden goes in in January. He makes his$6 ,000 lower payment. He does it in February. He does it all around the year. And then by December, even though he is not back to paying the original$10 ,000, it is now classified as a performing loan again. It goes back on the books as three.

28:29I'm with you. I got one caveat. Okay. Which is the big loan growth in the United States over the last 10 years has not happened in the banks. Okay. It's happened outside the banks. I agree with you, but some of these entities that are outside of the banks seem to be tied back into the banks. The banks lend to them. Yeah. But they don't make the loans that those guys make. But if those guys fail and the banks lend to them. Yeah, it's a problem. so here is from 2009 this is uh tdr which i believe is troubled debt restructuring right this is where this is basically modified loans right and if in 2009 if a bank had zero percent uh modified loans they failed at basically an eight percent rate in 2000 2009 however if they had above five percent trouble debt restructuring if they were doing a lot of loan modifications they were addicted to it.

29:24Right. They failed at nearly a 42%, nearly a half the banks. That's higher. Were failing if they did a lot, they got addicted to loan modification. I'm so glad I'm on a show where guys know math so well. This is their three-year disappearing probation. I'm still waiting for the punchline. This is organic there, okay? So if banks above 5 % trouble debt restructuring failed at nearly half in 2009, and nowadays you look at all the major banks for all of their major loan portfolios, credit, auto, CRE, and they're approaching 8 % or 9 % TDR. They're modifying their loans at really high rates. That's just CRE.

30:03This is just CRE, but I have the, I mean, I haven't got 14 graphs, but these graphs, I promise you, they track for Wells Fargo, Bank of America, J.B. Morgan. Okay. Okay. Calm down. Fine. More people need to tell me that. More people need to tell me that. First of all. Steve, okay. Okay. Okay. The guys who I talk to. Okay. The bank guys. Sure. Believe me. They pour all over. We pour over all this stuff every quarter. Okay. You know, when these banks report, the amount of disclosure is astonishing. It's not like it's hidden. Like, you go through JP Morgan's deck, you know what's going on. Okay. It might take you a couple hours to go through JP Morgan's deck, but you know what's going on.

30:47I mean, first of all, they're much better capitalized than they were. They have much higher reserve levels than they did. So I actually don't worry so much about what you're talking about. What I worry more about is what I don't know, which is that most of the loan – all this you're saying are true. If that was coupled with massive loan growth at the same time, then I'd really be worried. Because those numbers would actually be understated. meaning when you, it takes time for losses to show up. Yeah. So if the number is like you worried, it's 7%. Yeah. But let's say you're talking about a bank that's growing its loan book by 20 % per year.

31:37It's really not 7 % because the denominator is growing so rapidly. So what you would do to really understand is you would take the same numerator, but you wouldn't divide it by the current size of the loan book. you might divide it by the size of the loan book a year ago. Okay. You follow? Yeah. Because that would really tell you, because the losses that are happening now are not from the loans that you just made in the last year. Sure. But there hasn't been very little loan growth in the banks in 10 years. I think that's fair. I guess I'm just worried. What I would be, if I were here. If I could, I would try and understand what's been happening in Blackstone and Apollo and all those places.

32:20That's where the big loan growth has been. Okay. And the problem is that they all do it privately. So we don't know. So the guys that I talk to and really respect who have been covering financial services for as long as I have, that's what we worry about. We worry about the big growth is in private equity, private lending. And we don't know what the hell's going on there. There's no stress test there. There's nothing. Okay. It's a black box. Okay. So if tomorrow it blows up, someone's going to say, told you so. Right. But the problem, the difference between now versus what I did back then was securitizations report data every month.

33:00Literally every single credit statistic in a securitization is reported every single month. So when you were looking at subprime loans in 2007, every month in the middle of the month, the data come out. You'd look and say, still bad. There's nothing like that in the private side. All you have is anecdotes. So my feeling is the difference between what happened back then versus now is because subprime was so big, it got to be like 500, 600 billion subprime mortgage loans per year. It was 20 % of the housing market. And the underwriting was so bad. You got bad. You had losses before the economy got bad.

33:43So you see, the normal cause and effect is you have an economy, starts to go into recession, people start to lose jobs, and then you get bad credit quality. Right. And then the Fed cuts rates, we go into a recession, eventually we come out of it. Right. What was different about the subprime crisis of 2007 and 2008 was bad credit created the recession as opposed to the recession creating bad credit. That makes sense. Yeah. I don't, as far as I can tell, whatever you're talking about here or whatever is happening in the private world is not going to cause the recession. Whenever that recession will be.

34:24Sure. What I think will happen is there'll be a recession one day and then we'll find out who did bad crap. But it's not going to, you're arguing, you're making an argument that basically all this stuff is going to create a recession. And I don't think that's true. I think that's a fair pushback. But I am just saying that it's, you know, from the outside, it's a little spooky to see that this number is rising. But we will after, again, second quarter of this year, that number could be rising still. And we will not know about it because of the way this. And I understand what you're saying. I don't think it's going to cause a recession.

35:02OK. Now, if we have a trade war with China, we're going to have a recession. And then all this stuff will unwind. Yes. But again, your example you just mentioned about things unwinding before we even had a recession. You know, Tricolor and First Brand Groups. Yes, Tricolor. They both are failing after. Well, Tricolor might be just a fraud. Yeah, well, yeah. And a complete fraud. But are they the only one? Is it contained to just Tricolor or people? Oh, no. I mean, you had, I don't know if you saw CarMax had terrible numbers last week. Carvana has great numbers somehow every time. What does? Carvana.

35:37Yeah, every time. Every time somehow. I don't know. I don't know how it's done, but I know a bunch of people who are a lot older today because they were short Carvana. I lost a little bit. I'm stupid. But CarMax tells you that the consumer's got issues. Okay. That's all. That I agree with. Okay. I agree the consumer has issues. Maybe stepping away from the idea that this is all heading towards or going to cause a recession, just the mechanics of what he was explaining. because when you brought this up the first time, my initial reaction to the pressure on the regulators to basically relabel the loans after like a year of the reduced payments, but the reduced payments get to continue after the fact, my first reaction is, why is that allowed?

36:25Why is that okay? Well, you gotta have a rule. But the rule doesn't make any sense. The rule isn't doing anything of value anymore if you allow it to like go... Listen, compared to what used to exist, that's like nothing. Yeah, but that does feel like a terrible law. I understand what you're saying. It's not a great rule, but compared to what I was used to, it's like a cookie. But I was watching cartoons. I understand. This is great, though, hearing that our perspective, we just need to broaden it to the apocalypse. You're worried about, this is terrible, this is terrible. I'm telling you, what used to get worse, it's not even the same universe.

37:07Well, you mentioned a lot of the lending growing in private businesses or private equity. Right. What is, I mean, I hate to be a pessimist about that, but what do you think is kind of the worst version of what you could imagine going on versus what's - I'll give you the worst. I'll give you the scenario that someone would argue is horrendous. I don't know if it is or it isn't. Yeah. So years ago, Apollo bought an insurance company, a life insurance company.

37:48And there are people who argue that what Apollo has done is take a boring life insurance company that takes its premiums and invests in boring stuff, and they've loaded it up with private equity and other crap. Yeah. And that one day, the whole life insurance sector will blow up. Now, I don't think that's probably true. Okay. But that's one version of what some arguments people like. And then this, regardless of the extent of how bad it is, what may or may not be going on behind closed doors, you think all of that comes to light in whatever crisis unfolds in the future. If there's some sort of recession, it forces those things.

38:35What does Warren Buffett say? When the tide goes out, you find out who's naked. He said that, not me. And it's true. It always happens like that. I'm just wondering if it's like a nudist pool. It just feels like a lot of these things are more naked than they seem. Well, we'll find out. We'll find out. So I want to ask that. Yeah. That's fine. Swap into a pencil. So it seems like your view on at least the loans that Brandon is concerned about is more that might have a lot of consequence after a recession happens rather than being the cause of it. But that a China trade war might be a certain cause of it.

39:15So I'm curious what you think about that. We've just been reading multiple books about the relationship with China, obviously following everything going on there. What is your take on America and China's relationship and the consequences? I just can't handicap it at all, honestly. I mean, on the one hand, what we have over them is they are still incredibly export driven. I don't know if you know this. The United States of all developed countries is the least export driven economy of all. Our exports as a percentage of GDP is around 10%. Yeah. That's super high, right? It's consistent. And that's the lowest.

39:51That's the lowest of any developed country in the world. So if you look at Germany, it's 40%. If you look at most European countries, 30%. Mexico is 30. Canada is 30. China officially is 20, which is bullshit because they ship all the stuff to Vietnam that comes to us. It's probably like 30. That's why Europe caved. Right. Because when you're negotiating with someone whose exports is 10 % and your exports are 30%, you know what they call that? Problem. So that's why Europe caved. so what we have on china is they export a hell of a lot more to us than we export to them what they have on us is they got all the rare earth metals right and i don't know i just don't know how to handicap it i mean you know you listen to secretary um besson and it's like we're on the verge of a of a deal at any time but then but then i read other things that say china is going to demand that we abandon Taiwan completely.

40:51So I don't know. I don't know how to, I just can't handicap this one. Why do you feel like that would be so consequential versus anything else that might disrupt the economy? I look, I think we could live with a lot of, without a lot of other countries, but we can't live without China. Okay. What about, so my, my thought, I mean, we could live without China, but we'd have a recession. Okay. I mean, yeah, we'd purchase every yeah that's they're extricably intertwined I think as an example I run a portion of the business that I run is dependent on clothes and manufacturing that we get from China there's a bunch of Chinese factories that we work with to operate that business and if we couldn't get the products period from there we'd have to change everything about it right yeah and yeah the book we just read is about all the process knowledge that has been developed by China over decades and how it just doesn't exist in America.

41:43You can't just hire the people if you haven't trained that generation of workers over the last two decades. We've exported all of it. They have an entire ecosystem that would take us 10 years to recreate here. What I don't understand is even if we did throw up trade barriers and tariffs on Chinese goods and did a full-on trade war, I don't understand how they can't just ship it to Vietnam or Indonesia or Mexico. We're not idiots. We track it. Okay. Well, honestly. But by the way, Trump put 30, 40 % tariffs on that stuff already, on those type of products already. I was going to ask. I feel like that's a point actually that isn't brought up very often when we talk about that or when I hear other people talk about it.

42:27The fact that we track the manipulation of tariffs like that. Do you know how that happens? That I don't know. Like how are we? Yeah. That I don't know. The U.S. government does something. Yeah. So in the same vein, I'm curious for you as somebody who's incredibly deep in the financial world and presumably everybody in your world is trying to understand how all these tariffs are going to impact everything. As a layman, this year has felt incredibly tumultuous in terms of tariffs, trade war, just the uncertainty around everything. Yeah. You found it. And that's just for mine. I'm sure at your end it's very soothing and calm.

43:03I was like really kind of boring this year. I was hoping the same thing would happen to you. I was hoping for something exciting to finally happen. I've been smooth on my end. It was smooth. So it's, I think, hard for the average person to understand what the hell is going on. What do people in your world think about what is happening? I mean, I'm sure it's broad range, but. I think you go back to early April when he announced Liberation Day. People literally freaked out. They just freaked out. And I thought a lot about, like, why did they freak out? I mean, the market was down huge. I think the S &P was down like 16 % to 18 % from where it had been at its peak.

43:45NASDAQ was down like 30 % or 25%. And nothing could happen yet. He just made a speech. And so I was thinking to myself, like, why have people reacted so panicked so quickly? And it came with a theory. So I'm going to share it with you. Okay. Okay. And the theory is, I mean, people who are in the market are basically educated people. They all went to college at least. And they all took Econ 101. And economics is a very, very persuasive class when you take it. It's got graphs. It's got tables. It's got math. It's got math. It's got a PowerPoint. It's got people who won the Nobel Prize or wrote your textbook.

44:33And it's just very convincing. and one of the things that is taught to you in econ 101 is that tariffs are bad and you know terms of trade and and what's the call you know if you make bread and he makes guns everybody's richer yeah that type i forget what they called it and everybody everybody who went to college took that class and everybody believes it and then the president of the united states the president of the united states comes out and makes a speech and says i don't agree Like everybody is like saying, what do you mean you don't agree? We all took Econ 101. And that was so jarring to people that they freaked out.

45:14They absolutely freaked out. And then what happened was as time went on, it was like, well, where's the bad stuff? Like the companies reported, earnings were okay. And then they started to negotiate and they got some good deals. and the tariffs will be higher, but the world didn't end and things seem to be okay. That's kind of where we are. So there's no credence in your mind that there's been a bit of extended pretend going on, companies delaying raising prices because of tariffs? There's some of that going on. There's some of it going on. Because Powell was talking about that. Look at this way.

45:49If there was no AI revolution and Meta, Google, Amazon, who are you know oracle now and blah blah blah are spending 400 billion dollars a year building data centers if that didn't exist we'd have another story okay so that that is driving a lot of what's going on in a good way well yeah i think so far i prefer just a one-word answer with no depth here just tech is good ideally tech is good it's good i have to ask dan ives yeah Oh, yes. Even I, as an AI lover, was a bit like, come on, man. There's some Kool-Aid going on here. Well, they are spending the money. Oh, yeah. By the way, the difference between the dot-com bubble versus now is, and I don't even know if you guys were in diapers in the dot-com bubble.

46:42We won't ask. But in the dot-com bubble, you had companies nobody ever heard of who had just gone public. Right. who some of them had real businesses like Amazon at that point. Many had no businesses. They just had like a deck. Right. And they were spending all this money building out the internet. And they spent like lunatics. And it was too quick, too soon. And we had a tech recession. The difference between, and then a lot of those companies were bankrupt. Yeah. The difference between now and then is Google's spending$100 billion a year. These are real companies. And they're spending it. They're not borrowing.

47:22They're spending it out of cash flow. So it's real. Now, the question is, they're spending all this money. Are they going to be, what are the returns going to be on this investment? And is it going to be enough? And I don't know the answer to it. It's too early to know. Yeah, that's the big question, Mark. I mean, a parallel I'd like to ask you about is there was a lot of vendor financing in 2001. Yes, there was. You know, Cisco would loan someone money to buy Cisco's things. And we're seeing yesterday or two days ago, NVIDIA gives$100 billion to OpenAI. That was so funny. Who's giving$100 billion to Cisco, to Oracle, I mean, who's giving$100 billion to NVIDIA.

48:01Yeah, yeah. That bothers me. Okay. All right. Yeah. I don't like when things start to get vendor financing. It feels very insular. It feels a little GE. I don't know. I mean, I know GE. GE, that was a big part of that. They did a lot of that? Okay. Vendor financing. Interesting. But since you are a little bit more positive on the economy than at least me personally. And you. And me. I'm a negative Nancy here. We want to hear your portfolio review on our Gen Z young man here who has put all his money in some unique assets. Wow. And we want to hear what you think about that. This is a surprise.

48:40See, this is a graph so that you know it's good. It's good. It has a graph. very professional. No, it's only going up. Bye. Okay. So we've actually each brought a portfolio to review with you. Okay. You, because there's this amazing YouTube channel for those who are not where called the Steve Eisen playbook. The real Eisen playbook. I was talking about a different channel. You guys, Eisen play, which again, genuinely fantastic. And we figure actually, ironically, I listened to an episode the other day where you said that you do not have a step-by-step guide to investing. And here's why you think about it in this broader way.

49:16No, what I said is I do not have the Steve Eisman method for valuing all companies across sectors. That's actually a very important point. So when you read a financial textbook, they'll give you all these different methodologies of how to value a company. PE, price to book, EV to EBITDA, they go through the whole list. But they don't advocate anything. And what I've learned over the years, and the reason why I don't have like one method, is that there are 11 sectors of the S &P. It's actually a very important lesson for you viewers to pay attention to. So there are 11 sectors of the S &P, and there are subsectors within those sectors.

49:59And every sector and every subsector has a mafia. And what I mean by the mafia is the people who sell site analysts, buy site analysts, PMs, like the experts in the area. Now, the reason why I know this is because I was like chairman of the board of the financial services mafia for a long time. OK. And what the mafia does over time is determine two things. What are the data points that are important to track to invest in the sector? and how do you value companies in the sector? And it's different for each sector. I see. So, you know, for banks, it's price a tangible book. For some other sector, it might be PE.

50:41For REITs, it's AFFO. Each sector is different. And AFFO is adjusted funds from operations. It's like a version of EBITDA. So they all have their own jargon. But they all have different metrics. So in tech, it could be PE or EV to EBITDA, or sometimes it's discounted cash flow. It depends on the subsector. The point being, if you're going to invest in a sector, whatever sector it is, when I invest in the sector, I accept the terms of debate. I don't go in and say, they're valuing the sector on EV to EBITDA. I disagree. It's a pointless debate. Sure. Now, you don't have to play. You could say, I don't like this sector because I think it's too rich because I don't accept the way they value the companies, and that's fine.

51:34But if you're going to play, you have to accept the terms of debate. Then you do your fundamental work and whether you like the company or not. But you have to accept how each sector values its companies. I think it's a very important lesson. Yeah, that's very interesting. And I would like to see how you would – oh, sorry. Okay, so I want to preface this before we get into it. And I want to touch on how you seem relatively optimistic about the economy overall, at least in the U.S. And I want to push back or at least hear your answer about for young people, especially right now, like if you're in your 20s, you're coming out of college, youth unemployment is really high.

52:19your track to getting a salary high enough that you could save up for something like a house, start a family. Not great. All of these things feel pretty bad right now. They might push you towards certain investment markets as a Gen Z young man that you feel a little nihilistic and you want to kind of all in on certain things. And I just want your insight into how the average person and the difficulty in finding jobs right now and the jobs data that has continued to come out, how that matches up with your perspective on the economy being in an open spot. Because I think it's very much like a two-part economy.

53:01There's tech and all the stuff that's happening, which is very exciting and tremendous amount of money being spent. He's so excited. And then there's what you're talking about, which is very true. Most people can't afford to buy a house. When you say that, though, when you say tech, because that is a sector where some of, you know, especially younger people I know have found themselves laid off, unable to get jobs because the sector has changed so dramatically. There is all this investment in AI, but a lot of these positions that had formed at these companies over the last 10, 15 years have disappeared.

53:37People can't get jobs in the tech space right now. True. And does that struggle? Like, what is the difference between that struggle and the success of tech or the hope of tech that you're talking about? And now you're asking a hard question. I don't have an answer for you. I don't have a good answer for you. I mean, I just know the money being spent on tech is real. It's having some negative, real negative implications for people. So the overall economy is not as good as it could be if all those people had jobs. But unemployment is still pretty low. Yeah. So I just don't know how to hand it. I don't have a good answer for you.

54:13What would be kind of a big red or green flag in, because your opinion here seems pretty middle of the road. If I started to see unemployment, if what you're saying starts to cause massive layoffs and unemployment starts to go up, that's a different ballgame. Okay. Well, we just fired the head of the BLS, so maybe we won't get as accurate data as we want. It's possible. All right. Well, as a young man myself. All right. You have a plan. I'm trying to make my financial dreams come true, and I want you to just take a look at... Us three, we're old souls, millennials. Yes, we're all old souls. Our Gen Z companion here.

54:49What do you got? The Gen Z portfolio. Okay. So the 11 most expensive Pokemon cards. How do you feel about... So I recently decided I think I should buy or start getting at least shares in some of these cards. Any thoughts on this? On Pokemon? Pokemon card cards. It's exploded in recent years. Collectibles. It's exploded in recent years. It's not my jazz. What would the Pokemon Mafia say about such an investment? I don't know what they would say. I don't even know what the Pokemon Mafia is. Well, I'll have you know this market in the last five years, thanks to maybe Logan Paul, has really taken off.

55:31So you don't think it's worth it to pay$420 ,000 for a little piece of cardboard? I have no opinion. Okay. safe answer okay but what about this no not a no not a no so i i've i've been sports gambling a lot i i watch every weekend avid nfl fan uh get into the nba when it comes around mlb playoffs really anything i could bet on though like if you know what clothes you know the tennis player is going to come out in the the finals of wimbledon you can bet on it now how do you feel about me putting about 20 % of my earnings into this. I don't feel good about it. No, no, no, no. I don't think you understand.

56:09I'm dollar cost averaging into it. I don't feel good about it. Is it because of the sports? You prefer hockey? No, no, no. Do you think I should... Yeah, you should actually know something about me. I never gamble. Never? Ever. I don't go to Vegas. I don't do sports betting of any kind. Steve, you went to Vegas in the movie. Went to Vegas in the movie. But I didn't roll dice. I don't gamble. I never have. You missed the extended cut where Steve Carell spends about an hour at the Blackjack. Yeah, no. That didn't happen. That was the one inaccuracy. Well, someone said your big bet in 2007 was a gamble.

56:44Are you a gambler? I didn't think of it as a gamble. I thought, look, I did real fundamental research, and I thought I would. And I researched the team. I have no opinion on that. Okay. No opinion. Bitcoin. Well, more crypto broadly, you know, you got Bitcoin and that one's the biggest, I would say. Like I'm putting the largest share into that, but I'm putting stuff into maybe like 5 % of my earnings into like SHIB. SHIB? SHIB. What's SHIB? SHIB, it's like it's a coin, but it's not a real coin. It has a dog on it. But it's not Doge. It's a different dog. I don't have any opinion on SHIB. I mean, one of our good friends invested a thousand.

57:27I will admit, Trump and I own a little bit of Bitcoin. I thought he was going to say he owns a little machine. I do own a little bit of Bitcoin, but that's it. I'm curious, an actual question about this. Do you have any, you own a little bit of Bitcoin. What's your personal view on the merit of Bitcoin specifically? Like the good and the bad? Because it's become something in the last like 15 years. Like Bitcoin for me, I'm going to sit down now, started out as something where you used it to buy drugs on the internet. That's what it was used for. Right. And now it's worth over$100 ,000 of Bitcoin, and it's a gigantic piece of value that institutions make decisions about now.

58:08Huge transformation. So I'm curious what your perspective is. My issue with Bitcoin is not Bitcoin per se. So my issue with Bitcoin, and why I only own a little bit, is like if you sit down with the Bitcoiners, the philosophers of Bitcoin, and you say to them, give me a thesis. Like, why should I, why do you own Bitcoin? And they all basically say the same thing, which is that fiat currency, which is government currency, has been debased. So much has been printed. There are deficits, et cetera, et cetera. And then they'll say, but you can't like short the dollar because all currencies trade relative to one another.

58:53So the dollar trades relative to the euro. or the dollar trades relative to the yen. But they've all been debased. So just shorting one versus the other is a shell game, they say. So therefore, buy Bitcoin as a hedge against the further debasement of fiat currency. That's the thesis that I've heard a million different ways. Don't agree, but with them. No, I'm just saying that's the thesis. Yeah, yeah. So my problem, so my response to that is, okay, I'll grant you that. For the sake of argument, I accept your argument. Here's my problem with it. If that is the argument, then on days where NVIDIA is down huge and interest rates are up huge and everybody's petrified that the world's going to end because Trump just announced Liberation Day, Bitcoin should be up.

59:54And on days where NVIDIA is up 5 % and Oracle announces that, you know, the backlog's up 455 % and Oracle's up 10%, everybody's, and NASDAQ is up huge, Bitcoin should be down. But it's the opposite. But it's the opposite. But it's the opposite. So I don't know what to do about that. But I don't know what to do about that. I don't know why. So therefore, I own Bitcoin because every other schmuck owns Bitcoin. I think I'll be one of them. But my problem is I own an asset that acts contrary to its own thesis. I don't know what to do. I just don't know what to make of that. That's why I don't own more Bitcoin.

1:00:36I love that answer. I'm in line with that. I'm in line with that. I feel very validated. Well, you have 20 % of your money and shoes. What else you got there, big guy? What else? I'm scared of this one. This is... Now, this is unironically something. This is actually something he has in his portfolio. A massive investment. The next two. He put his real money... Guns! No, not even guns. Yes, yes, I'm an arms dealer. No, not even guns. These are digital skins that go on video game guns. So when you're playing a video game, you might have a more brightly colored gun than your friend. Yeah. Because you bought this skin.

1:01:12But here's the key. On your video. On the video. On the screen. How much money did you spend on this knife? Or this knife? Your knife. That knife was about$14 ,000. $14 ,000? It doesn't exist. It doesn't exist. Oh, did you not realize that? It's not real. No. No, I'll have you know a friend of mine bought me a real-life replica of it for about$20 that he gave to me. So it's like I kind of had a reality. Can we flip the page? I have no opinion.

1:01:48Okay, that's it. Now it's Doug's. Oh, wait. I forgot about my last. Oh, yeah. There's one more. You know, our lives are so, they're so digital these days. And I figured, why not get ahead? I'm a little late to the real estate train as a young Gen Z man. And I thought to myself, I can get ahead of the real estate trend on the web. Oh, no. So I bought this NFT apartment. This is an NFT, a picture of an apartment. A picture of an apartment that I can have at all times. And you actually bought this. You bought this for real. And I bought this for real. How much did it cost you? About$900. Wow. You spent$900?

1:02:29I did. I did. Sounds cheap. I spent$900. What's it worth for your apartment? Cheap. It's like, think about it. It's like your parents or like your grandparents buying a home in the 40s or 50s. Oh, on Park Ave. But they lived in it. And it's going to skyrocket. Tell him. No. He's losing all his money. I'll live in it in the metaverse. Okay. All right. Let's continue. Okay. Let's get to a more real portfolio from Doug here. All right. This is his portfolio. This is what I would call the tech portfolio. Okay. So I try to diversify in a lot of different things. I try to cover many different areas, specifically just AI, Mag7.

1:03:08That's it. Just the Mag7. And so I, Steve, often feel like you did. So I will confess that of the Meg 7, I own every single one of them. Except Tesla? Except for Tesla. Ah, interesting. Oh, man, dude. I agree. So what I would like to ask here. By the way, I just wanted you to think about Tesla. Just from a perspective of people who do real fundamental work and how difficult it can be to short stocks. So peak earnings of Tesla were in 2022. The company earned, I think, like$450. And this year, I think they're going to earn$1.50. So the earnings are down from 2022 through 2025, 60%. And the stock is slightly higher.

1:04:01So I was just thinking, imagine, you know, you're an analyst at a big hedge fund. Yeah. And you go to your PM and you go to your PM and you go, I got this great thesis. There's this company, it's called Tesla. I know you've heard of it. And my thesis is that from 2022, the earnings are going to go straight down every year until So we get to 2025 where the earnings will be 60 % lower than 2022. And I think in 2026, they'll be lower still. What do you think? Let's short the piss out of it. And you're 100 % right fundamentally. And it's a cult, so it doesn't work. You go crazy. So why doesn't it work?

1:04:48We did a whole episode where we sort of analyzed and debated Tesla. Because it's a cult. A cult can't justify a trillion-dollar valuation, right? It's a cult. I think what people really sincerely believe, and this was Dan Ives on my show, The Realizing Playbook. Realizing Playbook. Realizing Playbook. His thesis is that Tesla is going to do very well with robo-taxis and AI and robots. And robots. In your house. And Steve is saying this, by the way. And it's all going to be great. And that's why you got to own Tesla. And don't continue from there. We're going to clip that. And you know what? Number one, you could be right.

1:05:25And number two, there's no argument against it. Like you're arguing against something that'll happen in the future and people believe it. No, no. The argument is what you just said. The earnings are down 60%. And it didn't work. Yeah, but as an individual, you don't have to be part of that crowd. You can be like, I don't want to keep owning this declining car sales company. Okay. This actually, this is crazy. This actually loops into a question I had about the crisis and the movie that perfectly. There's a part of the movie where, and you bring this up, the frustration of dealing with a company, a bank like Goldman, who refuses to adjust the price of the swaps in a way that reflects the market because they set the price, right?

1:06:08Correct. And this feels similar in that all the underlying data that you're looking at is bad. It indicates that Tesla shares should be going down. But Tesla doesn't set the price. But in that case, Tesla doesn't set the price, right? At least the market is setting the price in this position. But coming back to the movie for a second and the actual crisis that happened, you were talking about how you still don't know to this day why Goldman or these other banks weren't lowering the prices. And I was wondering if you - Oh, I know why they weren't lowering the prices. They weren't lowering the prices because they own the stuff on their own balance sheet.

1:06:43Yeah. And they didn't want to market down. Okay, that's what they say in the movie as well. I was wondering what part is confusing or not confirmed still then that you were explaining. What happened with the confusing part to me was not that some firms didn't mark down their books. That I understood. What I didn't understand was there were two different types of securitizations back then. One was called cash in and one was called cash out. And don't ask me what those things are because I used to know and I don't remember. But one was better than the other. And we were short both. Okay. Okay. And so what happened was I got a call from, and generally Goldman's prices were honest.

1:07:28Merrill Lynch didn't lower prices. We didn't deal with them. And I got a call from my golden salesman, who was a lovely guy. And he said, we got to have a conference call with you. I said, okay. So we set up a conference call and it's me and all my guys are in the room and it's him. and then it's like his boss and then his boss is like, this is serious. Okay, everyone brought it. You're going to be serious. That's a big deal. And I don't remember whether it was the cash in or the cash out, whichever one was worse. So let's say like on the last day that we got prices for this stuff, the average price was like 70.

1:08:07And we had shorted the stuff at par. So we were already 30 points in profit. So he comes on the phone and he says, we checked our models. and we realized that the methodology we've been using to price your bonds has been wrong. And so we have to reprice all your bonds of this type. And so, okay, so the last price was 70. What's the price? He goes 80. At a time when you expect the price to be going down. Every day? Yes. Okay, this is like late spring. Very. So then I said, okay, well, so the price is 80. I said, give me a two-way. Meaning, the price is$80. But if the price is$80, I'll short more at$80 all day long.

1:08:54Yeah. All day long. Gimme, gimme, gimme, gimme, gimme. But of course, there's a bid and an ask. So, like, it was$80,$60 was the bid ask. So they'd only let you short at$60. So something that he says just repriced me from$70 to$80, if I want to short more, I'd have to put a short at 60. But they're only marketing at 80. Right. To this day, I don't understand what happened. Is it illegal? Why is it illegal? They set the price. There's no screen. Well, then why would they ever even have to? I don't understand what happened. To this day, it's a mystery to me. What happened? I don't know what happened.

1:09:31It's so funny because I brought this up hoping to get a clarification. Because in the video, you say, I don't really know what happened. I don't know what happened. To this day. That's wild. it feels so incentivized to lie at all times to you but still it's better than 2008 so real quick one more in tech so we hit tesla which is i think valuable and actually in the real eyes been playbook uh which i was watching you spoke with both vc friend and then the one this morning yes um basically how you know that most of the stock growth right now in at least the S &P 500 is coming from these tech stocks and from AI where you're saying 100 % right and the the money being spent is at least coming from cash flow they're not in debt to do this right but it's all hinging on a on AI generating enormous value and I think what is a very plausible scenario I don't think this is real obviously tech we we all agree text the no like for two years we have been just like you trying to convince everybody that AI is perfect and And we're going insane.

1:10:34I'm just kind of curious how likely, let's say it's the tech bubble in 2000, but on a smaller scale, that at some point, the next couple AI models come out, that iterative leap isn't as exciting as people realize. They're starting to realize, wait, this really doesn't work for customer service yet. And the entire SMP loses all of those gains, thus triggering. If there's an announcement in, I mean, if you listen to, you know, NVIDIA, it's definitely not this year and it's not next year. But let's say in 2027, you know, Meta comes out and says, we're cutting our CapEx budget in half. Lights out.

1:11:11Market's going down 20%. Just poof, gone. Do you feel as long as the CapEx, as long as they continue to put the money there? Now, you know, Saudi Arabia is now spending money and UAE. There's now like the second derivative. People were spending all this money building data centers all over planet Earth. But if there, I mean, it could be. in a sense a redo of the bubble in that you know henry blod by the way henry blod i used to work at oppenheimer which was when i was on the sales side and in 1998 um henry blodgett was at oppenheimer he was in the office across the hall from me and he got on the he would get on the sales floor every single day and he said the internet's going to conquer the world and dynastic levels of wealth are going to be created.

1:11:55And he was 100 % correct. Right. But at first, the returns weren't there. And that's why we had a tech recession. So you could have a situation where there's the timeline that people are hoping to have real returns on this stuff doesn't really materialize and people pull back. And then eventually it does happen. It's on the other end of a - That could happen. I mean, Zuckerberg was on a podcast a few days ago saying he's willing to, he would rather lose a few hundred billion dollars to be early and then be too late. But he expects it to be like three years. If it's not - That the returns will be there in three years?

1:12:31Yeah, well, he's saying - But if it's eight. If it's eight. Seven, you know. Yeah, then the 100 billion dollars add up. I mean, you know, right now, for example, when you go on Google and you do a search, you get two responses. You get your old search response and you get the AI response. I mean, the AI response is better. It's not the Albert Einstein. So, you know, we need more proof that's going to be real returns that are coming, but it's early, you know, so you can say whatever you want, but it's hard to sit out, you know, as an investor, I'm not sitting out. No, yeah. I'm just talking to our audience.

1:13:02Like if a lot of them are invested in the same thing as Doug here, where this stuff has been working, right? When it dips, they buy it because it's going to work. It's been working. Keep working. And so you don't have a word of caution for them that you think it's not yet. Okay. Okay. Not yet. Not yet. You think even the S you know, even somebody like myself who puts a lot into the SMP thinking, well, let me diversify. I don't want to go all in on tech. In reality, I am investing into the tech growth. The problem is, what would you diversify into? Procter and Gamble? Well, that brings you to my next word.

1:13:31Well, that is a great question. That leads to the other millennial. Let me go to the third portfolio here.

1:13:39The doomsday portfolio. The doomsday portfolio. Okay, go ahead. My portfolio, it consists of one asset. It's gold. Just gold. Gold. Just gold. Let me give you my thesis. It's going to sound so different from what you said earlier. Whoa, there went gold. Doomsday. Gold. The U.S. currency is a fiat currency that's getting overprinted, but you can't short the dollar because you'll get the study by gold. And that's worked. So far this year, it's worked pretty well. So I'll give you the counter. Not that gold hasn't worked. Sure. Because it has. Congratulations. Sure. But I'll just give you the counter argument to the doomsday thesis.

1:14:21Sure. So the people who have the doomsday thesis have been making this the same argument for 40 years. Yes. OK. That's a long time to make an argument. That's 100%. OK. Call me crazy. This is our year. But this is our year. Year 41.

1:14:40But, you know, the argument is basically too many deficits, too big, too much printing of currency. It's been debased by gold. Now, by gold has worked because people accept that argument. But what most people never ask themselves is. OK, so why hasn't the doomsday scenario happened? Very fair question. It's a fair question. Like if you make an argument for 40 years and it hasn't happened, but all the data that you said is going to cause the doomsday happened and yet it hasn't happened, the obvious question you should ask yourself is why hasn't it happened? So I'm going to answer your question.

1:15:19I want to say I'm not 40. I can't even do it that long. I know that people have been guns and bullets and beans in their bunker. I've been pushed a little more in this direction lately. And the thing that made me kind of come over the edge on it was a book that we recently read by Ray Dalio called How Countries Go Broke. Yes, Ray Dalio is thinking cats and dogs are going to lie down together any moment. Any moment it's going to happen. He's been making that argument only for 20 years. Okay, I don't agree with this guy on everything, but to give credit to his argument, I think it's indicative of something that does take a long amount of time.

1:15:57and we're at a stage where our country is so over-leverage. So my pushback, remember, okay. Why hasn't it happened? So this is what people don't, look, most people don't understand anything about how the financial system of the world works. It's just like, it's very esoteric. I mean, I do, it's what I do for a living. So the reason why the dollar is still the reserve currency of the world is not just that we're the biggest economy in the world, It's that the entire financial system of planet Earth functions on treasuries. So, for example, banks all over the world lend to one another overnight in what's called the repo market.

1:16:42This is like a multi-trillion dollar market. It all functions on treasuries, short-term treasuries. If you're a sovereign wealth fund, you're in Norway, and you need to park, I don't know,$500 billion for five years, you're going to buy five-year U.S. treasuries because there's no alternative. There is no alternative currently to treasuries. And as long as there is no alternative to treasuries, we will remain the reserve currency of the world. And so all the deficit problems that people are worried about, I think, are academic. Now, if an alternative ever shows up, like people think Bitcoin is going to be it, or maybe it's China bonds or something I don't even know, and there's a real alternative to treasuries, then all the arguments about the deficit and the debasement of the dollar are much more important.

1:17:40But until then, I think it's academic. to even slightly push back i would just say you can push back hard there's an uh because i think what you're saying makes total sense and i definitely don't want to be uh flash forward 40 years and i'm making the same argument and i'm i don't want to do that but i want to say i think there's a credible case to say that there it is that gold is is starting no currency can fill it in i totally understand that there it's the we're the cleanest dirty shirt no one can go or the RMB or the Euro or the yen. However, country like China, country like Russia, country like all these countries have started to, on net, their central banks are owning more gold and less treasuries.

1:18:18Their percentage of treasuries is either held flat or down. Right. And I think the idea would be you would trade with another country and then settle the difference in gold. Are we going to go back to the gold standard? I don't know. I don't think so. Maybe not, but that's what the direction of travel might be. I don't think that's right. All right. That's fair. I mean, put it this way. the price of the risk that you're talking about is the 10-year treasury yield. If it was like a real problem and people were serious. But is that not? Don't tell me what you're saying. Tell me what you're doing.

1:18:55Okay. Okay. Don't tell me that you're panicked about the deficit. Put your money where your mouth is. Sell your 10-year treasuries and drive the yield up to 6%, 7%. be a bond vigilante. Yeah. Then I take you seriously. Otherwise, you're just partificating. Yeah. I mean, where's the 10-year treasury yield now? 4.1. You know, it's not done anything in three years. Sure. So the alarm bells of this actually happening are just not going on. They're not going off. Yeah. So as we've done a lot of research into the U.S. deficit, you just addressed this, and I wanted to ask you about it, and you're saying it's academic.

1:19:33I'm just wondering, how do you, I mean, is there a point at which, you know, we're 36 trillion in debt now and whatever a trillion goes to interest every year in our budget. At some point, even if we continue to stay as the reserve currency, does that become a problem? Sure. I mean, but I don't know where that is. I mean, I don't know. Right. And you don't want to waste your life trying to guess it. I don't want to be Pete Peterson. Right. Who's Peterson? Pete Peterson was the guy who started this argument 40 years ago. He's dead. and you're alive that's one to zero that's a win yeah okay you touched on something uh a little bit before this like that that these the financial industry on the whole is difficult to understand it's it's it's difficult to engage and understand with the system that we all still participate or a part of in some way right do you have are there any misconceptions or that are so pervasive that bother you that you wish you could have everybody understand like any any big points of financial literacy that if you could just snap your fingers and everybody could just know you would if everybody could know that lesson i gave you guys about how banks work they'd feel a lot more comfortable about banks right now i mean the funny thing about bank did you ever see the movie i mean of course i've seen this movie it's a wonderful life with jimmy stewart the christmas movie So that scene where he's running a building and loan, which is a prototype of savings and loans, like a little bank that makes home loans.

1:21:09Okay. And there's a run on the bank. That's what you see in that scene. Everybody shows up and they want their money. It's a big crowd, yeah. The point about that scene, which people don't understand, we want banks to be levered. Here's why.

1:21:31back to that formula of return equity equals return on assets times leverage. So let's say the average, a 1 % return on assets is not bad for a bank. Because they have a lot of assets. No, because that return, just trust me, is not bad. It's not great, it's not bad. So if you're levered 10 times, you get a 10 % return on equity. That's not terrible. So let's say the regulators come in and say, that's too much. We don't want banks to be levered more than 3 to 1.

1:22:05Now what happens is you still have the same 1 % return on assets, but your leverage is only 3 to 1. Your return equity is 3%. Well, that's inadequate. So the only way for a bank then to make a lot more money, to generate sufficient return, is to charge a hell of a lot more in interest. I see. You follow? So the point is we want banks to be levered because by generating, let's say, a 1 % return on assets and they're lending, let's say, at 6 % or 7%, which let's just say for the sake of argument is fine, they generate an adequate return. If we don't allow them to be levered like that, all of a sudden what they're going to charge in interest is so much higher so they can generate adequate return.

1:22:58So the formula about banks is really, it has to be a levered business model because if it's not levered enough, it becomes prohibitive for the entire economy. So the message is you want banks to be levered, but you don't want them to be too levered because it's dangerous. It's like little bears porridge. What's just right? No, I've never thought about that. Like if you cap it too low, the access to lending for everybody, whether it be business or personal. They'd have to charge so much more on a home loan. They'd have to charge double, triple to generate an adequate return. But who could afford it?

1:23:42Right. And then no one can buy cars. No one can build houses. I mean, the point about banks is what do they do? They recycle money, which are your deposits. That's the leverage. they take your money that you put in the bank and they lend it out yeah we want them to do that yeah yeah what we don't want is for them to have too much leverage so that if they have lost if they make mistakes and then the losses are too high they blow up or too concentrated in one or too concentrated in one okay yeah makes sense absolutely makes sense i'm curious part of why i have enjoyed this conversation so much is you actually learned something well one and two it seems like with a lot of what you've discussed.

1:24:21One, you're just very willing to say, I don't know what's going to happen there. But in part, you know, like the 40 day doomsday scenario, it, it seems, please correct me if this is wrong, that you're not as worried about what might happen with, you know, the AI companies 20 years from now. And it's more like, this is the current analysis of the market. Is that roughly a fair way of, of how you approach the market? Are you thinking much about those like 20 year in the future? It's too far for me. Okay. People who think that, that far, you can say whatever you want. Yeah. No one can verify. What's there to say?

1:24:49I'm happy to go out a year. Okay. Well, on that final note, then, I want to ask, you know, for our audience, again, a lot of them are younger men and interested in finance, interested in business. Probably check out the Realized Man Playbook. But what are some areas of the market that you are looking at or investing in? What's something your eyes on lately? I'll give you one. Yeah, okay. This is a little weird. Yeah. Okay. Well, not we're than Pokemon cards or TSGO guns. That's not weird. Trying to pull them from the NFT apartments. And this is new for me. Okay. I only have one very small investment in it.

1:25:26Marijuana. Marijuana. Like stocks. Now, normally, I wouldn't touch these stocks. But President Trump is making noise that he's going to do something here. There's a thing today on Truth Social where on his, whatever you call it, where he posts his stuff on Truth Social, He put out a video basically lauding and praising the effects of weed for elder Americans. Really? I swear to God. Wow. An entire video. And the problem with the weed business has been that the regulation's all over the place. You can't get banking. And this is the second time he's done this in the last month. so i'm starting to think maybe el presidente is going to do something like significant in weed and maybe we should own some weed stock right oh like federal legalization or something i don't know i don't watch the video it's shocking it's really shocking do you chief that loud not me man i do not participate but you're saying we should all go and buy an ounce of I would say physical weed.

1:26:41The only thing I would tell you is the weed standard. Go on truth. Social. Watch this video. Make your own decisions. Okay. I got, I got to ask on that because Trump is so, I don't know if you've noticed a bit tumultuous, um, changing the word. I've gone through three. It's evolved. It's evolved like the fucking Pokemon. Tumultuous. Um, so he's got these tremors and it feels like every time he said, every week, it feels like often what he was saying the prior week changes, right? So with something like this, how do you choose to put money behind something that the current administration - I put a very small percentage.

1:27:15I'd take like a 1 % position. Okay. And I'm hoping for the best. But are you like a, at this point in your life, are you a dollar cost average in the S &P kind of guy? I don't do that kind of thing. Okay. I buy stocks. Okay. And I'm pretty fully invested. And this is like a new thing for me, this marijuana thing. I put a little bit of money in it. And he doesn't dollar cost average in a DraftKings. The DraftKings, you're not - doing parlays on basketball. You can win big. You can win so much bigger. You certainly can. Steve, thank you so much for coming on the show. You're very welcome. This is fantastic.

1:27:49It was a pleasure. Thank you. It was a lot of fun. I want to reiterate it unironically. The Realized Man playbook on YouTube is fantastic. I have been enjoying it so much. Deep dives with really interesting experts. And Steve does a weekly recap of your thoughts of what's going on. It is fantastic. And so I really recommend checking it out. And just to close, is this is this from what we were talking about before. This is your new main endeavor. Like you started. This is what I do. This is what I'm doing full time. Yeah, that's awesome. That's awesome. And you have such an insane list of connections and guests that you've been pulling in to talk to.

1:28:18And so, yeah. And also, I think you mentioned you might bring us on for one of the Fridays. I would love to have you guys on for a Friday recap. We're saying that on the recording because you can't take it back. I'm not taking it back. Now you realize our knowledge base. He's got one edit note. He's like, I don't want you guys on anymore. No, no. It would be a lot of fun. I think so too. Thank you so much. Thanks so much, Steve. Appreciate it. Thank you.