Steve Eisman on Banks, AI and His Next Big Bet

27:59That was never my position, but that obviously was the position of the market. And that now seems to be going away. So, but like I said, you know, people, I like to say, you don't think about your paradigm, you inhabit it. And one of the paradigms is that we're all entitled to live in a zero rate world. That's gone. It's just everybody hasn't woken up to that fact. Well, just on this note, can you talk a little bit about what's going on in consumer discretionary? Because those stocks have been doing really well. And yet there is this or there seems to be this big question mark over the strength of the American consumer.

28:34So if you look at the surveys, I mean, a lot of people seem to think we're basically back in the depths of 2008. We definitely aren't. If you look at the hard data, the spending continues. So how are you thinking about that? I've heard from some companies, you know, very large banks that really have the best data, that consumer spending has really slowed in the last couple of months. The consumer is still relatively healthy because everybody's employed. So, you know, you're not going to see like a real deterioration in consumer credit or anything like that until people start losing their jobs.

29:08You know, is that going to happen? I don't know. I think it's probably more likely than not. But until we start to see unemployment go up, you're not going to see a problem with credit. That doesn't mean the consumer is not going to pull in their horns. I mean, you're starting to see that in a lot of different retail companies. I mean, I think everybody saw Dollar General, how much that went down because spending at the lower end is slowing. People are starting to trade down. So it's happening behind the scenes, but it's a little glacial because everybody is employed. But on this theme of sectors that stay buoyant because people have jobs, housing, big surprise over the last year, homebuilders continuing to do very well.

29:47Maybe they're a little bit off their highs. Home prices not far off their highs, only modestly. I know we talked about this in March, but it seems like home prices are back on the rise again. Like, is there any - They are. It's actually very, I mean, the first to admit I was wrong about this. You heard it here first. I'm surprised that the home builders have done so well with rates so high. But there is a shortage of housing. I do think that existing home sales are still fairly low because with everybody employed, and if you have a 3 % mortgage, it's hard to sell your house and buy something else if you want to trade up and get a 7 % mortgage.

30:27But the home builders have been very good at cutting some of their prices, their costs, incentivizing people for their internal mortgage companies. I'm actually very impressed by what they've done. We talked a little bit about residential real estate the last time we had you on. We didn't get to commercial real estate, I don't think. And I'm kind of, I'm jumping the gun. I would have remembered. I'm jumping the gun a little bit because we have had some audience questions on this topic. But how are you thinking about CRE risks at the moment? Well, I mean, there's a lot of different categories of CRE.

30:59Well, let's talk about cap rates first. Leave aside fundamentals. You bought something when rates were nothing and you paid a 3 % debt and your cap rate was, let's say, 3 % or 4%. And now if you wanted to borrow, you're going to pay 7 % or 8%. The value of your real estate went down, period. The area that is the most problematic is obviously office. The areas that are probably the worst are San Francisco and New York. I'll just give you a shocking statistic. I've looked at it the other day. I was stunned. Do you know what the market cap of Vernado is? Two billion. You should let me guess. I was going to say three billion, but maybe it's got a blue.

31:39Maybe it's 2.2. That's unbelievable when you think about it. So, you know, the market has really repriced the public entities, but the private entities really haven't marked down their portfolios there because nothing is trading. There's about$175 billion of office debt coming due this year and about$150 billion of office debt coming due next year. If you took out a loan, let's say three, four years ago to buy something and the LTV was 60%, today it's probably 100. So I mean, the issue is the refinancing and I think it's going to be tough. So you mentioned the market isn't trading. Is this one of those situations where maybe illiquidity can be your friend if you don't have to mark it down because you know and as long as you don't have to sell anything right well the problem for you is that when your debt comes due then you got a problem until then you could as we like to say extend and pretend at some point could there be a do you think about a point where you can bid on the public equity or public aspect of syria i mean three billion it does seem like oh We're talking about like the end of sort of like New York work as we know it.

32:54I haven't done enough work on this. But people that have say it's very problematic because, I mean, I'm sure some of you have seen, you know, Blackstone and Brookfield. I mean, these are not small companies have given back the keys for some of their pretty good buildings because, you know, they know that that's going to come due in a few years. They know what the cash flow is going to be and they can't support the cash flow. So they're giving the keys back. So if Blackstone and Brookfield are giving back buildings, you know, how's everybody else going to be? Now, there are what I'd call AAA properties in New York City.

33:29I don't know San Francisco as well, like, you know, one Vanderbilt. But after that, you know, after a couple of buildings that are like that, I think the rest are problematic.

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35:15A front payment of$45 for a three-month plan equivalent to$15 per month required. New customer offer for first three months only. Speed slow after 35 gigabytes of network's busy. Taxes and fees extra. See MintMobile.com. Since you mentioned interest rate costs, it feels like people have been predicting, I think we touched on this earlier as well, but people have been predicting a turn in the credit cycle for years now. and it has yet to happen. We've seen maybe some idiosyncratic bankruptcies, but nothing sort of en masse or systemic. What would be the catalyst for that actually happening and how likely is it?

35:44I actually don't think there's going to be, I think there will be, I mean, look, if we go into some kind of recession, I think there will be a normalization of consumer credit. I don't think the consumer is over levered. There's really no subprime mortgage lending in the United States at all. There's very little subprime credit card lending. There's some subprime auto lending. But whatever problems happen is not going to be, I think, in the consumer area. Like I said, there'll be normalization. You know, loan loss provisions in the banks will go up. It's not a calamity. You know, what's going to happen in high yield, office, et cetera?

36:18But those problems will be, you know, for example, the office will be concentrated in CMBS and in certain regional banks. So it's going to be more concentrated as opposed to systemic issues. I have a career question or maybe a career advice question. Very knowledgeable on banks, obviously, real estate, knowing specific buildings, thinking about understanding payments, et cetera. How do you allocate your time? Because I don't know this stuff in depth. What do I do all day? Is that what you're asking? Yeah. How do you allocate your time to have a solid feel for multiple sectors? Yeah. I have a cup of coffee, black, iced.

36:55Okay. We're on the same page until this far. I get into the office. I start to read all my emails. I log into Bloomberg. Oh, thank you. And there are companies that come into Neuberger. I go to the meetings. I do some research on individual companies. Trading day ends. There might be some more to do when I go home. That's my day. What piques your interest, though? How do you make decisions about whether or not to get really into a sector or a company? Look, it depends. I mean, I'll just give you one stock, which hopefully Neuberger won't shoot me tomorrow about. So we've owned a company for a while called Quanta.

37:36We have it in most of our portfolios. So Quanta is a company, you know, utilities don't do anything. You know, somebody has to build the utility. Someone has to manage the wires. Somebody has to bury the wires. So, you know, Quanta, prior to all this grid stuff, used to sell at 10, 11, 12 times earnings. But because all the stuff about evolving infrastructure, the opportunities for the company have been enormous. So the stock has been revalued. How often does that happen? Not that often. But when you have the potential to do something like that, you go all in. But it requires a lot of work. But this was something that as you saw infrastructure coming and because you were familiar.

38:16I'll give you an example of what we saw. So, you know, the utility in California, I think it's PCG, you know, there's a strict liability rule in California that basically says if PCG causes a fire and is only partially responsible, they're completely responsible. So the old CEOs of PCG weren't too good. The new CEO was superb. And so she's embarked on this plan to basically bury all the wires of the company. Think about what that means. This is not Rhode Island. This is California. That's a lot of wires. Who's doing that? Quanta. That's going to take years to do. Stuff like that, the infrastructure stuff in the United States is pretty pathetic.

39:04I remember years ago, I had a conference in Hong Kong. I fly in, the airport's completely new, you can literally eat off the floor, you get into a car, you get onto a highway, it looks like the highway was just built yesterday. You go over a bridge, you go, did they just finish this yesterday? And then, you know, you go to this wonderful hotel and then you come back to the United States and you go to JFK and you're embarrassed. Like this is the United States of America. Like it's unbelievable. Then you get on the Van Wick and the Grand Central Parkway and it's, I mean, it's just unbelievable. By the way, have you noticed that when you're driving to JFK where the Grand Central meets the Van Wick, there's this construction there.

39:45You know how long that construction's been going on? 12 years. Like, 12 years? I could have done it myself faster. Like, what's going on with that? LaGuardia isn't even connected to a subway. But that's better than the Van Wick. It is true. I went to the Seychelles recently, and I will say, like, a tropical island in the middle of the Indian Ocean has better roads than coming back from the airport from JFK and fewer potholes, which is rather amazing. We could listen to Steve rant about U.S. infrastructure for a while. Provide insightful commentary on U.S. infrastructure for a few more minutes.

40:21But we do have a lot of audience questions. Shall we take some? Yeah. All right. From Tim Linton asking, what is the trigger for higher unemployment? The problem with making a big case for higher unemployment is if there's a shortage of labor. This is a little bit of the revenge of the middle class. So, you know, the 2008 crisis destroyed the lower middle class in the middle class. Here, the layoffs are in tech and Wall Street. The middle class is actually doing quite well. I mean, what would cause a real uptick in unemployment? Look, if the Fed keeps raising rates and the economy really starts to slow down, there'll be some layoffs.

40:59Do I think they're going to be very high? I don't, because the labor shortages are still so important. People may want to warehouse their employees. Here's a question. Since you mentioned your knowledge of the payments industry, Casey 1221 asked, what about Apple? In terms of a company with just incredible moat in some way, there's always talking about becoming a bank or cards or whatever. Could they make further inroads in payments and become an entity that takes share or profits from someone else? I mean, they certainly could. I mean, it's so easy to pay stuff with Apple. So I do think Apple's already making inroads.

41:35You know, how much farther they want to go, I don't know. You know, there's the Apple credit card that's run by Goldman Sachs. I don't think Apple's ever going to really make a bigger inroad in the credit card business. The payments business, probably. Another question from AB1 asks, what are your thoughts on private credit? Will direct lending replace commercial bank lending long term? Well, that's an excellent question. You know, given, let's assume the regulators do raise the capital requirements for all the banks. It's going to force the banks really to, at least the regionals, to really narrow some of their lending because they're only going to want to make loans where the risk weight is low.

42:20And I know that the private credit lenders are literally salivating over this happening because, you know, Dodd-Frank, under Tarullo, who was the vice chair of financial supervision, not only did he lower their leverage by like, he cut it basically in half, but he narrowed the scope of what lending they could do. And that really opened up for the private credit lenders. Assuming that happens again, the private credit lenders will have even more room to play. Another question, the reshoring boom. People talk about reshoring, friendshoring. As you talk about this new paradigm, partly maybe kicked off by a lot of the public investment being made for IRA and chips, etc.

43:02How are you thinking about that? What is like what do you see as sort of maybe the medium term of some of these trends and different ways it could shake out? Well, I think general reshoring is going to take time. Yeah. You know, factories aren't built overnight. I still think there's probably a reluctance by companies to bring all of their shoring back to the United States because they're so used to cheap labor. But I do think, you know, part of the story, given all the legislation that's come back, is something of a re-industrialization of America. How long that's going to take, I don't know.

43:41I think, like I said before, the biggest story is going to be the grid. The grid is absolutely crucial. I mean, the estimates of improving the grid in the United States are, you know, everybody's got a different estimate, but it's like 200 billion, 300 billion. I mean, it's unbelievable numbers. That's going to think going to be the biggest theme. Actually, I'm going to ask my own question based on that answer. But why do you think the U.S. seems to, at least in recent years, be quite bad at infrastructure? Well, we haven't spent money on it in generations. Have I noticed, you know, when was the last time, let me put you this way.

44:17In the New York metropolitan area every highway every every parkway every bridge every park was built by robert moses you should all read the book by robert carl robert moses superb that's the 30s 40s 50s and early 60s that was the last time the united states really spent a ton of money on infrastructure Our infrastructure is just very, very old. But why? I mean, I guess my question is why? Yeah, why? Can it change? We issue all this debt? I mean, I'm not president of the United States. Go ask the last several presidents why they didn't spend money on this. But they didn't. Well, current and former presidents of the United States have an open invitation for all thoughts.

45:00Absolutely. Well, speaking of infrastructure, I don't know if you have a view on this. It's not particularly. Commodities, people talk about copper. I have no opinion. No opinion. There are enough ways for me to lose money without going into commodities. OK, here's another question. U.S. consumer restart of student loan. Is that something on your radar or is that not a big enough deal? He's ruling it for people who are listening. I mean, look, I will just tell you, you know, putting on my lawyer hat, Supreme Court's probably going to rule that what the Biden administration did is not kosher. But I actually think that the people who are suing literally have no standing to sue.

45:38but given the composition of this court, they're basically not going to care. So I think the case is going to go against the Biden administration, even though it shouldn't. The court should just throw it out, but they won't. A question from Nathan Tankus. He asks, it's an interesting one. Is there an index which you would prefer that more properly weights tech relative to the S &P? No comment. all right i have another question that was put in there from nathan it was regarding svb you said that the way that they ought to have dealt with it is let the uh let the bank fail and then guarantee let the bank fail but how does that solve moral hazard because then everyone because everybody would know that if the next bank you know eventually will take away the deposit insurance yeah and if your bank fails we won't guarantee you maybe we put another the guarantee of all the deposits.

46:34So basically the guarantee of deposits. You got to be diversified. I mean, I'll give you an example. Okay. So I have a friend who runs a VC company and the Thursday of Silicon Valley in the afternoon, he freaks out. He goes online and he pulls all his money. And then he wakes up Friday morning and his money's still in the bank. So he runs to the branch. He's 50th in line. I didn't know that there were really people got in line. Oh, no, they got in line. there are 50 alpha males with tens of millions of dollars in the bank i used to be an alpha male i'm not i'm a beta and um don't ask how i got there and um they're all waiting in line and a woman comes out who's probably like a teller i mean literally and she comes out and she says um i know you're all here to get your money but unfortunately uh the bank has just been seized by the federal government and we can't give money to anybody.

47:31So the first guy in line starts screaming and he says, I'll clean it up. He goes, I want my effing 50 effing freaking million dollars. And she says, she says, sir, I just lost my job. And he starts screaming, I want my 50 effing freaking effing million dollars. And that guy could have learned a lesson about diversification because if he had, he wouldn't have been there. The teller needs to give the It's a Wonderful Life speech and say it's in Teal's portfolio. You shouldn't say that because most of the people in this audience don't ever saw the movie. Resistance. People have seen it. It's in that chat GPT.

48:15I have, well, I mean, we can keep going, but one more question. Keep going. I got nothing to do. All right. People are asking for free portfolio advice at this point. If you want portfolio advice, I'll give you my card, you can come invest with me. Which sectors slash stocks are at most risk for a short squeeze in the next 12 months? That's from Georgina. No comment. No comment. All right. My friend would just kill me. Here's a question. I think it actually ties back to a bunch of these things. Someone asked your thoughts on American exceptionalism. And I think it sort of ties to this. No, it ties to like, can we actually setting aside the money?

48:56Like, because there is a lot of money, like build, we know that there's money going into factories or structures booming. But then there's the question of like, OK, are we going to like do a good job of it? And with a lot of this green spending, with a lot of this resource, like, are you confident that with the money there that like it'll actually turn into something productive or is it like, I mean, some of it will be productive. The issue really, the issue really is at this point that to actually do something with the federal government money takes a long time. Now, whether they can shorten the time, that's very important.

49:28But it's more of a time issue, I think, at this point than a competence issue. Well, on the grid thing, which it sounds like is sort of two questions. Like you said it's like the big thing. How many years? And then does more need to happen on the sort of regulatory side? Because this came up in the recent debt ceiling negotiations, permitting. Like, can you actually like put up the wires, et cetera? Are you watching for more action on the regulatory side for this thesis to really play out? I mean, I am. I mean, the problem is that, and I don't say this pejoratively at all, but people who have a very environmental bent, not bet, bent, don't want any non-solar to be built.

50:15But the problem is that to get from here to there, you're going to need a bridge. so they fight any permitting you know but the problem is you can't wave a magic wand and electrify every single car in the united states so that's a real problem i don't know how to solve that other than you know this administration has to really push through you know shorter permitting i know we can keep going yeah but maybe we should leave it there and encourage the audience members how could you not ask a question about crypto come on oh you know it's funny so there wasn't Come on. No, that's great. That's great.

50:50Someone put a question in there about crypto. I was like, oh, do we really? OK, but please, what is the, give us a take on crypto. OK, so there. This is so good. I'm glad you did. So as I'd like to say, not that I feel that strongly about it. So there are two issues about crypto. Is it actually a currency? And number two, what's it good for? So personally, I have my doubts that it's even a currency. But let's push that aside. What's it good for? so one thing we know for certain what it's good for is money laundering that we know for certain is it good for anything else other than money laundering so at this point it is certainly not good for transactions in the real world because the cost of it is just way too high now the people who argue that one day you know one day it'll be cheap enough to do I have my doubts because do you know how much money goes over the rails of Visa and MasterCard per year?

51:49It's like two trillion. You know how much Visa and MasterCard charge per transaction? Ten basis points. So I think assuming that these coins really exist in terms of the real world, it's going to take a very, very long time for there to be enough volume for there to be cost efficient. Until then, it's mostly going to be about money laundering. So what else is it good for? So people keep coming up with new theories. So obviously it's not good for transactions. So then the thesis was that it's a way to hedge against the debasement of fear currency. So the problem with that thesis was, and still is, that if that's the case, then Bitcoin should go up when everybody's freaking out about the stock market and freaking out about inflation and nasdaq is down and people are freaking out about the stock market and that's not how bitcoin acts it goes up the car i actually calculated it's the correlation over the last several years of bitcoin and nasdaq is anywhere from 40 to 65 depending upon what time period you're talking about so that thesis can't be true so bitcoin in that sense is just another warm form of speculation the latest thesis that i heard because, you know, people don't give up, is it's a form of, what's the word?

53:15Store of value. I knew it would come to me about it. I was having a data retrieval problem. A store of value. I heard this from a bunch of people. It's a great store of value. And my response to that is really... Oh, this is the anti-bank thing. And I go, really? Is it really a store of value? How could it be a store of value when it goes up and down like a yo-yo every single year? you know currencies don't do that you know people who trade currency you know a 10 move in a currency like the dollar in a year is extraordinary so people who trade currency the only way you can make money generally is to lever yourself enormously you can't have a currency that's a store of value that goes from 20 000 to 50 000 to 20 000 to 25 000 you know in between you're going to the bathroom and coming back.

54:06So I don't understand. Honestly, somebody should tell me because I just don't understand the social utility of Bitcoin. Again, other than money laundering. But that, it's excellent. I'm guessing you're about to get swarmed by at least a few crypto proponents who might be in the hole. Yeah, yeah, you know, come on. We'll have a nice fist fight. It's okay. Great. All right. Well, on that happy note, shall we leave it there, Joe? Let's leave it there. All right. This has been another episode of All Thoughts.

54:46Well, that was our live episode with Steve Eisman, recorded as part of the Bloomberg Invest Conference. I'm Traci Allaway. You can follow me on Twitter at Traci Allaway. And I'm Joe Weisenthal. You can follow me on Twitter at The Stalwart. Follow our guest Steve Eisman on Twitter. I didn't even realize he had been on there. He's at Eisman Steven. Follow our producers, Carmen Rodriguez at Carmen Arman and Dashiell 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.

55:21We have a blog and a weekly newsletter. And you can chat with fellow listeners 24-7 in our Discord, discord.gg slash OddLots. It's a lot of fun. Go there and check it out. Thanks for listening.

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