Is Private Credit The Next 2008? — ft. Steve Eisman

14:06Ed Elson:So if you spent, I think it costs, when I was running my hedge fund back then, I think it costs us like$10 ,000 per year, which when you think about it for a database that was that important, it was not that expensive. You could literally look at every single securitization that was created in the United States and look at all of the credit data for every single securitization. And there were methods where you could see whether the newer securitizations were doing worse than the older securitizations, which is the way you wanted to look at it. And you could do some real credit analysis to figure out what was going on, which is what I and my partners did.

14:42Ed Elson:In terms of private credit, that market has grown enormously. There's some signs of a couple of bad credits here and there. and that's all I can say because I don't have any data.

14:53Scott Galloway:I just want to double click on both those things. Are you saying the risk around AI is the risk to other companies like we've seen with this quote unquote SaaS apocalypse or the risk of overspending or valuations built into these AI companies? How does the risk manifest itself as it relates to AI and valuations? Let's just pick on open AI just because it's so much fun

15:12Ed Elson:to pick on open AI. Okay, so here's a company that just raised$100 billion at a valuation of, I think it was$850 billion or 700. I mean, when you start to get to these numbers, it starts to lose me. I'll call it$800 billion. So now you've raised$100 billion. You're losing money. You're going to continue to lose money. At some point, you got to make money. Are you going to generate sufficient level of returns to justify the valuation that you got on your last round? I would suspect probably not. but we won't know that for a year. So, you know, once that happened, once people start to realize that the returns aren't going to be as good, you will see a slowdown, I think, in the whole AI enterprise.

15:59Ed Elson:That's the risk.

16:00Scott Galloway:On the private credit side, does that mean there's opportunity or you think that there's going to be further erosion of value among the BizDev guys, the Blue Owls, the TPGs, the KKRs of the world? Well, they would say that, you know,

16:15Ed Elson:people are picking on their exposure to software. And what these companies basically did was private equity went out and bought companies, a lot of which was during COVID when rates were basically zero. About 20 to 25 % of the companies that were bought were software type companies. And they were levered up with private credit from funds, mostly owned by different kinds of private equity companies or business development corporations. and the question is whether or not these are good credits or not. Now, people are freaking out because they think that AI is destroying software. I actually don't see any signs of that in terms of the earnings.

17:00Ed Elson:You know, I was sort of amused when ServiceNow reported about a month ago. So when ServiceNow reported, I tried to go to the numbers as carefully as I could, and they were great. I mean, there was no question. And there was not one number that you could pick on to say, aha, here's the problem. You know, the revenue was over 20%. They beat on revenue. They beat on guidance. They beat on earnings. And the stock was down 10%. So, you know, I've never seen a group that goes down on good news, bad news, and mediocre news. It just goes down on news. So, you know, people are freaking out. But at this point, they're freaking out on a narrative.

17:48Ed Elson:There isn't any, you know, if you go through the numbers of these companies, there's no real evidence that there's actually a problem, at least not yet.

17:56Steve Eisman:It's really interesting because it seems that there are so many different scary narratives out there that are premised on very different things. Like, for example, the AI bubble narrative was the concern that we're getting too far over our skis, that these valuations are too high, that we're not going to see the returns. That's its own concern. Then there's the concern that AI is so powerful, and this is what we saw in the Cetrini article, that it's going to delete all of these jobs and that it's ultimately going to destroy our economy, which is going to be this sort of self-defeating mechanism.

18:30Steve Eisman:And then there's the other side of this, which is the private credit issue, which I I have to say, I, and I think many of us understand a lot less than the first two. You're not alone. Yeah, right. And I think the thing that is striking to me is your point, which is, definitionally, we don't know what is going on because it's private. That's just what it is.

18:54Ed Elson:It's actually worse than that. Okay, please. Because everything I've said so far is bad enough, okay? But one of the parts that's worse, which, again, I don't know how to quantify it, is that over the last 10, 12 years, many life insurance companies have been bought by private equity companies. Now, and then what they have done is they have improved the returns of those companies by having those companies invest in the paper that they themselves generate. Now, in their defense, the yields on that paper are higher. The risk isn't necessarily worse. Could be. We don't know. But the other thing that has happened is they run these companies much more aggressively than traditional life insurance companies were run.

19:56Ed Elson:So normally when you reinsure, you reinsure part of your book with a third entity and you have an arm's length transaction and you lay off some of the risk onto a third party reinsure. What some of the private equity companies have done is they've reinsured part of their books to their own reinsurers, which sit outside the United States in very, very opaque transactions, but which appear, at least appear to me, to pretty dramatically increase the leverage of these companies in pretty hidden ways. So not only do you have private credit, you have private credit sitting in life insurance companies controlled by private equity who have levered those companies even more.

20:43Ed Elson:That's the complexity of it. Now, thank God we haven't had a credit cycle in this country in 17 years. So everything that I'm talking about in some ways is academic at this point because nothing bad has happened, which is what the people who run private equity would say. If you went to the Blue Owl and you basically told this story, they would probably say something like, what are you complaining about? Nothing bad's happened. Well, nothing's bad happened because we've been very, very fortunate not to have a credit cycle. If we have a credit cycle, and like I said, there are some signs that it's starting to emerge, we'll see what happens.

21:21Steve Eisman:It seems as though one of the differences, and this is what we saw in 2008, is that those bad loans were not contained. They sort of extended to every part of the US economy, which is why it was as painful as it was. So far, what we've seen is there is some concern over private credit. I've been reading about it. I've been hearing about it. I've watched the stocks of these companies like Blue Owl, which is kind of the poster child. I've watched it go down. And to me, I sort of look at that and think, well, I guess people kind of know what's going on. So if this means that Blue Owl goes out of business, then whatever.

21:59Steve Eisman:But I guess the next question becomes, is it bigger than that? Are there ways where this can materialize and affect all of us?

22:06Ed Elson:The reason why the great financial crisis was so bad, I mean, it was bad enough that there were bad subprime mortgage loans and people lost their homes. What made it really bad was that the banks almost were going to, they were all going to go bankrupt. And when banks go bankrupt, people can't get their money and people can't get their money. It's a freak show. So that's why the great financial crisis was so bad. In principle here, it won't get as bad because the banks aren't the lenders here. It's the Blue Owls of the world and the KKRs and the Powell's of the world. So mostly the people who would be hurt here would be institutional investors.

22:46Ed Elson:The caveat that I just gave you is that some of this stuff is in life insurance companies where they're individual policyholders. The other caveat is that banks do make a lot of loans to private equity companies. So they help fund them as well. Now, how big that is is not exactly clear. It's not small. But I don't think the banks – look, the banks are the best capitalized they've been in our lifetimes. So even if something really bad happened to private equity, I think the banks would be fine. People might get nervous, but I think it'll be okay. I'm more worried about what's going on in life insurance than I am worried about anything going on in the banks.

23:32Steve Eisman:We'll be right back after the break. And if you're enjoying the show so far, send it to a friend and please follow us if you haven't already.

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26:29Steve Eisman:We're back with Profty Markets.

26:31Scott Galloway:One of the most impressive things about what you and your colleagues did was you saw the risk that other people weren't seeing and you figured out the instrument to leverage that alpha or that dislocation. What's the trade here if you think that private credit is riskier than people perceive?

26:49Ed Elson:The problem is that in theory, you would try and buy credit default swaps on various kinds of credits. The problem with that trade is that that market is far less liquid than it was in 2006 and 2007 because the regulators don't like that market very much. And they've placed a lot of capital requirements on it. So, for example, I don't know if you saw Oracle's credit default swaps have completely blown out. You could think about whatever you want with respect to AI. I don't think Oracle is going bankrupt. The reason why Oracle's credit default swaps have blown out is that the credit default swap market is extremely illiquid.

27:38Ed Elson:So if someone, some hedge fund, you know, like Elliott Associates decides, hey, you know what, let's go pick on Oracle and go buy some credit default swaps, it doesn't take a lot of volume to move that market. So the fact that Oracle's credit default swaps have blown out to some very, very high level right now, certainly Oracle's problem, but it's happened because it's an illiquid market. So doing some version of what I did in the debt markets right now is very, very difficult. The only obvious trade would be for someone to keep shorting the blue owls of the world. But those stocks have gotten obliterated.

28:18I'm curious in terms of risks that we're not pricing in or that we don't see. Well, I'll put forward a thesis and you respond that it's very difficult to outrun multiple

28:29Scott Galloway:contraction. You can perform really well in a market, but if there's flows out of the market into another market, you can double your earnings. But if the multiple on Brazilian stocks goes from 20 to 10, your stock's flat even after doubling your earnings. What I perceive as a risk, and this is some of my political bias coming through, is that the rule of law and the rules by which companies get to play by seems to be one-offs now. It's no longer – a lot of companies are now subject to a certain amount of political risks that they weren't subject to before. And there's some evidence, I believe, that we're potentially going to exhibit after 17 years of multiple expansion, multiple contraction, in that every company now faces some existential risk in the S &P around what I'll call this multiple contraction.

29:20Scott Galloway:Your thoughts?

29:21Ed Elson:I don't agree. One thing I've come to as a conclusion about markets over the many years I've been doing that is that they're completely amoral. Not immoral. Amoral. They're completely different. Everything that you just mentioned, you would think that they should care about? They don't care about that. What they care about is are you going to beat the quarter? Are your returns going higher? What are your margins doing? If something President Trump does actually impacts those numbers, then you're going to get multiple contractions. But as long as what happens politically doesn't impact margins, revenue growth, earnings per share growth, the market don't care.

30:07Steve Eisman:But what about stability? I mean, I think the argument from, I don't know, hedge fund managers who are taking it out of America is that we just don't, we don't know what's going to happen here. We want some certainty. We want some stability. I think it's nonsense. That's nonsense. Really?

30:21Ed Elson:Nonsense. Like I said, I think the market's very moral. People are talking their political book, and I don't think the market cares. I just don't think the market cares, whether that's good or bad. I just honestly don't think the market cares. I mean, look, I thought in 2007-8, I thought people would care what was going on because people were financially being destroyed. The market didn't care at all. They only cared when profits went down. That's all.

30:45Steve Eisman:Wouldn't tariffs be part of that calculation? I mean, if you believe that the tariff policy is going to be reductive to prosperity, and maybe the political biases are causing people to overshoot that and exaggerate it in their calculations, but wouldn't that still be part of the calculus?

31:04Ed Elson:It would be part of the calculus, but at least so far, I think everybody—you know, the funny thing I think about it is we all went to college. We all took Econ 101. You know, economics as something you learn in college is very powerful. You know, they put these graphs up, they put these numbers up, and you basically walk out of the thing, well, they got to be right because, you know, there's so many numbers, how could they possibly be wrong? And, you know, one of the things that we all learn in Econ 101 is tariffs are bad, destroys the economy, you know, yada, yada, yada. And I think that's why the market went down last year between late February and April 9th.

31:45Ed Elson:And then it turned out it wasn't so bad. It wasn't that bad. And so the market went back up. So, you know, until... Now, there's some sectors where it has hurt, you know, like the Staples group. You know, it hurt. And so that's one of the reasons why Staples performed very poorly last year because they had actual margin compression on their products. But other than a couple of subsectors, it hasn't really seemed to have shown up very much. The U.S. economy still grew last year. The whole, you know, The thing that drove the U.S. economy last year was AI investment. Right. And that's what's still driving the U.S.

32:19Ed Elson:economy. That's why I'm so focused on it because if there is a real slowdown, there's no question in my mind. If you could give me a day and said on this day, it became very, very clear that AI investment growth was going to get cut in half. I tell you, we're going into a recession. That's how much the U.S. economy is dependent upon that, right?

32:40Scott Galloway:So I'm trying to figure out some potential traits here. If you think that Iran is a bit of a, I don't know, I don't want to say a nothing burger, but isn't going to have nearly the impact we think it might. We've seen energy stocks go up because of the anticipation that the Straits of Hormuz might be more impaired for an extended period of time, taking oil prices up, taking profits of oil companies. Is that a potential short right now? And also on the flip side, so I agree with you. I look through the numbers of Salesforce, ServiceNow, Adobe. I could see absolutely no evidence of why their stocks were down 3%, much less 30%.

33:17Ed Elson:I'm glad you said that because I thought I was going crazy. I bought those three names, yeah.

33:24Steve Eisman:That was gutsy. It hasn't been great, but I'm still holding strong.

33:30Scott Galloway:I'll go to a second tier of why. Everyone's saying, well, these prompts could put the businesses out of business. Okay, only 10 % to 20 % maximum of their total top-line revenue goes into technology, meaning that 80 % of the value they offer is not the technology that AI theoretically could replace. It's client management, UI, relationships, debugging. So the whole thing, it strikes me as a massive overreaction to fears that if the worst fears play out, it still doesn't – I just can't see anyone strip – I've been using Salesforce at every company I grew.

34:09Ed Elson:And you can't see stripping Salesforce out of your company. You just can't imagine it. It's too difficult. Yeah.

34:15Scott Galloway:These companies are very good at embedding themselves in your company. And the idea that all of a sudden I'm going to pass them on with coming up with prompts to replace Salesforce. Anyways, talk to me about the thesis around going long, the SaaS companies, and going short, the energy companies.

34:34Ed Elson:Well, let me first say, I don't trade. I am not a trader. I'm not a medium-term trader. I'm not a short-term trader. There are certain things that I'm good at, and being a trader is not one of them. So, I mean, what I'm better at is picking long-term ideas, both long and short, and basically sticking with them. If I was trading, I think energy stocks, as a trade, will be lower in a couple of months. That I agree with. the software one is I'm tempted for my own personal portfolio to buy some of these software stocks I'm too afraid it's like catching a falling knife you know these things go down on like that thing that happened last week that fantasy story I forget the name of the Satrini that was like you know that was like reading an Arthur C.

35:32Ed Elson:Clarke novel. You know, it was no better than that. It was a fantasy story. The person who wrote it just concocted some stuff together and everybody freaked out. But, you know, trying to... The narrative on software stocks is now so bad. And the problem with buying them is, you know, it's like I said before. They've gone down on good news, bad news, and mediocre news. So what's the data point that's going to get people to say, wait a second, there's a lot more here in terms of software than just making software? Maybe it's just time. But there's no data point, I think, that you could point to that's going to change the narrative.

36:18Ed Elson:That's the problem with buying those stocks. But it's tempting to start to think about buying them.

36:23Steve Eisman:Something I've wondered, Steve, is I think a lot of us have watched The Big Short. And a lot of us are moved and inspired by your story. And this is just ubiquitous across all individuals who are interested in the markets, who are investing in the markets. Everyone knows about The Big Short. Something I wonder is, I wonder if your story made everyone want to be the next Steve Eisman.

36:53Ed Elson:so by the way so i had a very funny line on tv a few months ago where i said you know part of the problem here i'll just repeat it because it's it's it's it's a good one i said i said you know part of the problem here is that is that you know i once predicted the end of the world and i have no interest in predicting it anymore it was not exactly a pleasant experience but everybody people want to predict the end of the world because they want to be me yeah and i got news for them all the role of Steve Eisman is already taken. But I think that it's funny, but there's truth to this. People want to be the person who predicts the next end of the world.

37:34Ed Elson:Let me say something to those people. Listen, it wasn't such a pleasant experience the first time around. It was very aggravating and a lot of very anxiety producing. But for some reason, people just want to predict the end of the world all the time. It's also like, you know, there's this whole thesis out there that, you know, Bitcoin for a while had this thesis, which, you know, unfortunately for Bitcoin doesn't act like that. But the thesis that Bitcoin people had was that, you know, we're all going to, the whole world's going to end. You're not going to be able to buy anything in the store with your dollars.

38:10So buy Bitcoin.

38:12Ed Elson:That was like basically the thesis. And it actually turns out that Bitcoin doesn't act like that at all. It just goes up when NASDAQ goes up and it goes down when NASDAQ goes down. But, you know, that end of the world thesis has been predicted in one form or another for the last 40 years. You know, I remember in the 90s, Pete Peterson was making the same claim. And nobody ever steps back and says, wait a second, this claim has been made for 40 years. why hasn't it happened? And I actually find that more interesting. And I think the reason why it hasn't happened is that, and this is where, you know, what people don't know about the financial system is basically everything.

38:57Ed Elson:The entire financial system of planet Earth, it's not just that the dollar is the reserve currency of the world. The entire financial system of planet Earth runs on treasuries. You know, you've got a$3 trillion overnight repo market that purely functions on treasuries. And so the reason why the dollar hasn't had a demise is because there's no alternative in terms of the financial system to treasuries. If you were to say to me, this product, whatever it is, Chinese bonds, whatever, is a real liquid alternative to treasuries, I would tell you, okay, now I can start worrying about the dollar. But until then, I think that argument is academic.

39:40Steve Eisman:I think the question then becomes, because you're one of the few people who actually did once predict the end of the world and you got it right. And so the question then becomes, what was different about that prediction versus all of the other predictions, which, as you point out, are all quite reasonable and compelling? whether it's what could happen in the private credit markets, whether it's what could happen to the fiat currency and the current system of the hegemony of the dollar and treasuries. I mean, all of these different questions that I'm always reading, I'm like, I wonder which one's going to be the next 2008.

40:19Ed Elson:How do you know? Well, the difference is that there's no data. You know, so if you want to be one of those people who says the world's going to end, fiat currency is going to end because governments are spending too much money. That is the beginning, the middle, and end of the argument. There's no other data point. Whereas when you were talking about the subprime crisis, you got monthly data that the consumer was deteriorating. And then as you dug further, you realize that this paper was owned by systemically important financial institutions literally all over planet Earth. So if the paper kept getting worse and worse and worse, there were going to be massive losses all over the place.

41:09Ed Elson:That was the story. And you could track it every single month. When you're talking about some of these other theses, whether it's private credit or fiat currency, you know, like going back to private credit again, The only thing I can actually say is now it's a$2 trillion market. It's grown enormously. And there are a couple of credits, Tricolor, First Brand, and this new one in England, MFS, that have gone bad. But in terms of the size of the entire market are still pretty small.

41:41Scott Galloway:Just along the lines of the deficit, spending$7 trillion a year on$5 trillion in receipts, do you see that as an existential risk? And if so, how does it play out in terms of a potential trade?

41:53Ed Elson:I don't see it as an existential risk at all. I think that U.S. debt to GDP right now is 125%, something like that. Japan's at 240. So, and Japan has had lower rates than we have had for the last 30 years. So, again, I come back to the point that I made before, which is as long as the entire global financial system runs on treasuries and there's no alternative, I don't see the deficit problem as a problem. If there was a real alternative so that major money could go elsewhere, then I'd be worried. But until that happens, I just don't see it as – I see it as an academic fear. And by the way, the whole freaking world always wants me to predict the end of the world.

42:46Ed Elson:So it upsets people when they bring up these issues and they feel very passionately about them. And I sort of poo-poo them. People get upset because they're always – sometimes when I go on television, they're literally like begging for me to predict the end of the world. And I'm going to say, no, the world's not going to end. It's sort of funny. It's because we want the click, Steve. Yeah, I know. I understand. All right, listen, the world's going to end there. You can use that.

43:16Steve Eisman:We'll be right back. And for even more markets content, sign up for our newsletter at profdewmarkets.com slash subscribe.

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44:36Scott Galloway:Support for the show comes from Harvey AI. Law is craft, forged through repetition, sharpened by judgment, perfected in the details most people never see. Practice made perfect is Harvey's belief in relentless refinement, in turning complexity into clarity, pressure into precision, and experience into advantage. Legal work isn't just about knowing the law, it's about applying it carefully, consistently, and under real stakes. Harvey is an AI platform built specifically for legal practice, helping teams analyze large volumes of documents, draft with precision, and collaborate securely across complex matters.

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45:24Ed Elson:Are Democrats their own biggest problem? You know, a party becomes defined by who their central figure, who their quarterback becomes. Democrats haven't really anointed a effective quarterback since Barack Obama, pretty much. And this week, the Atlantic staff writer Mark Levovich joins me to discuss the state of the Democratic Party and which races to keep an eye out for this midterm election.

45:48Scott Galloway:The episode is out now. Search and follow Stay Tuned with Preet wherever you get your podcasts.

46:00Steve Eisman:We're back with Profity Markets. So just looking at 2008 again, one of the differences that you point out here is that back in 2008, there was data that was actually indicating that there was a real systemic problem here that was going to be genuinely destructive to the markets and to the economy. Right now, what we have are a lot of narratives. We have these think pieces on Twitter, that are portraying kind of compelling stories, but they're not really providing the data saying, look, it's happening in real time.

46:30Ed Elson:What I actually find fascinating, until whatever correction we're having right now, let's go back to last year when the market was up a lot. What's amazing is you have two contra-narratives going on in the market. You had the stock market going up, everybody's rah, rah, rah, rah, NASDAQ, AI, et cetera, et cetera. So everything's good. And then you had gold going to$5 ,000, because fear currency is going to end. Now, the two cannot occur. They cannot live for very long together. And yet, it's like there were two different worlds of investors, like on two different sitcoms that don't talk to each other, and they were operating completely independently of one another, one basically predicting the end of the world and one basically saying everything is fine.

47:16Ed Elson:And that was, I think, one of the more fascinating things about last year.

47:19Steve Eisman:100%. And the polarization that we're seeing among investors right now is a whole other new paradigm unto itself. But when I look at and read about 2008 and try to understand it, something I don't really understand is I'm kind of an efficient market hypothesis believer. Like I generally believe that - I'm not. So I guess this is the question. It's like, how is it that the data was there and no one knew except for you? That's not a fair statement.

47:52Ed Elson:Okay, sorry. Okay. I mean, it's sort of a fair statement, but it's not a fair statement. First of all, it's not like I'm the only person who looked at the data. That is definitely not true. I looked at the data, but the entire securitization fixed income world looked at that data like Moses coming down from Sinai with the tablets every month. I mean, that world, that data would come out like mid-month over two days, and that market stopped. Literally, there was no trading done for two days while people poured over that data like it was the freaking Rosetta Stone. So the statement that, and here's where I disagree with the efficient market thesis.

48:37Ed Elson:The information was there. The entire fixed income world had that data. They disinterpreted it wrong. Now, they saw the data getting worse. It's not like they said to themselves, oh, the data is getting better. The data was not getting better. Because they had made so much money in that market for so many years. And they basically had, at the end of the day, you could boil down that entire market down to one assumption. And if that assumption's held, they would have been fined. And that assumption was that housing prices have not gone down in the United States on a national basis since World War II.

49:22Ed Elson:And because housing prices have not gone down on a national basis since World War II, they can't go down on a national basis. That entire market rested on that assumption. So as long as the data got worse, as long as housing prices still went up, they figured it would be losses, big deal. What they didn't see because they didn't do forensic investigating of the mortgage market was that the underwriting standards had deteriorated to such a crazy extent that people were getting loans to buy homes. They couldn't even afford the first payment. And that eventually took housing prices down. And so I think housing prices in the United States went down 20 to 25 percent from point to point.

50:07Ed Elson:So when you layer that on top of all the delinquencies and repossessions, that market imploded. But they were not set up intellectually to accept that until it was too late.

50:19Steve Eisman:Would it be fair then to say that where we mess up isn't that we just don't see the data, but when our careers and our livelihoods depend on us interpreting the data incorrectly.

50:35Ed Elson:Yes. I think the hardest thing, one of the hardest things for all human beings, me too, to deal with are paradigm shifts. You know, you exist in a paradigm that's been around for a very, very long time. Your whole career is based on that paradigm. you've made a lot of money in that paradigm and then it turns out that the paradigm is either changing because of technology or maybe the paradigm was actually wrong because it was based on continuously increasing leverage which is what the financial services industry's paradigm was based on. People have very human beings have tremendously difficult time dealing with paradigm shifts.

51:18Ed Elson:Tremendous. It's like a nightmare. They don't want to deal with it.

51:22Scott Galloway:Stephen, what did the movie get wrong? What was, you know, it's a dramatic interpretation or it's meant to be entertaining. What was exaggerated to the upside or the downside? What does the film get wrong?

51:39Ed Elson:I'll tell you what I thought it got wrong, but it turned out they got right. when I watched the movie the first time and it came out in December, January December 2014 January 2015 I thought I thought that what Steve the character Steve Carell played was great it was incredible portrayal he should win an Academy Award God willing but that surely I wasn't nearly as angry as he portrayed me to be That was my conclusion. And then what happened was way back in 2010, President Obama had created this Financial Crisis Commission, and I was one of the people interviewed. I had completely forgotten about it.

52:26Ed Elson:And in April of 2015, the Financial Crisis Commission did a data dump. They literally disclosed every single piece of paper that they had. and so um i got a whole i was able to read the transcript of my interview and when i finished reading the transcript i said to myself no steve carell he got it right he got it right

52:50Steve Eisman:you are that angry i was yeah i got questions about the movie too uh my favorite scene was the sushi scene you uh steve carell playing you uh is talking to this guy who's explaining how the whole system works and he's like one of the worst guys you've ever met and he's like

53:06Ed Elson:eating his sushi i feel sorry for that guy he's not one of the worst guys anybody's ever met he was just one of the people who managed cdo's and he had the misfortune of having dinner with me

53:18Steve Eisman:well i love that scene uh i love the way the guy conducts himself my question is actually i have two questions there's the sushi scene and then there's also the scene uh with the real estate brokers and they're like, you don't understand. He's not confessing. He's bragging. When you look at the markets today, who are the kinds of people who reflect both the sushi CDO guy and also the real estate broker who wasn't confessing he was bragging? That's a great question. I think the private equity guys are the guys who have had it great

53:56Ed Elson:for the last 15 years. And I think it may turn out that they're right, that there are no problems, and their stock prices will go back up. But I think they're all right now in a bit of a state of shock that people could be questioning what they've been doing for the last 15 years. So that's who I think that sort of mirrors in a way.

54:21Steve Eisman:Steve Eisemann is an investment analyst and portfolio manager with decades of experience in financial markets. He's best known for his pivotal role in predicting and profiting from the 2008 subprime mortgage crisis chronicled in the big short. Steve founded and managed Emris Partners, a long-short equity fund focused on fundamental analysis. In 2014, he joined Neuberger Berman as Maddening Director and Portfolio Manager. Currently, Steve Eisenman is the host of The Real Eisenman Playbook, a weekly financial podcast. Steve, this was a pleasure. We really appreciate your time. Thanks very much. Nice to meet you, Stephen.

54:51Steve Eisman:Thank you. Real pleasure.

55:02Steve Eisman:Ed, what did you think? I thought that was fascinating. I think my... I'm always trying to understand, because I wasn't really around in 2008, or I was, but I didn't know what was happening. I was just playing football and playing video games. So I don't really understand that time. But I am always fascinated, like, how did the world get it so wrong? And how is it that this handful of guys were able to get it so right? Steve being one of them, Michael Burry being another. And I am constantly asking myself, when is that moment going to occur again? And it's not always clear to me. And so I think my biggest takeaway is his description that the reason that it happened was because people were so dead set on misinterpreting the data that they didn't even realize that they were misinterpreting it.

55:57Steve Eisman:It was so essential to them for their lives, for their careers, and for their professions to not conclude what probably should have been concluded when they looked at the numbers. And I feel like that's a kind of helpful framework and difference for understanding what the next big misunderstanding, what the next big crash might be. And so I guess my takeaway is I'm now looking for that. I'm looking for the areas in which people are intentionally misinterpreting things because they have to. Because if they would interpret it another way, well, it would be a huge inconvenience to them, to their companies, and to their careers.

56:37I do think that the war in Iran is about to be

56:44Scott Galloway:markets nothing burger. I just don't think, I think there's an opportunity. I think oil is going to be less expensive in a month than it is now. And it strikes me if you listen to the Trump administration trying to do this improv kabuki dance of trying to find already a way to declare victory and leave as the Republican Party. This is the issue. It appears that the Republican Party is finally turning on him around. He's already saying, oh, we wanted to do the following things. These are our objectives. It's weird that they, it's clear that they hadn't thought through what their objectives are, but they laid out a series of objectives.

57:23Scott Galloway:It's basically, as far as I can tell, giving them a ripcord to just get out. And the result will be, I think, that energy prices will stabilize. And you already see in the markets that if you look what's happened in metals, which are kind of a risk off, they've already declined. They spiked, and now they've declined again because it appears that they're not as freaked out.

57:50Steve Eisman:I actually disagree with that. Maybe we'll talk about it in another episode, but I feel like pulling the ripcord, getting out of there, and now what, is the big question that I feel like we're all assuming or we're being maybe overly optimistic that now we've reached stability. We've gotten rid of the boogeyman. We've gotten rid of Khomeini. Now we're good. And to be clear, I'm not a geopolitical expert. I'm not a military expert. I don't know. But I do think that there is almost, I'm a little bit struck by the sense of confidence that investors seem to have that now we're stable. Now it's somewhat solved.

58:30Steve Eisman:And I just don't feel fully convinced of that yet.

58:33Scott Galloway:I'm not sure it's stable or solved. I think people, whenever they hear war and 20 % of oil flows through the Straits of Hormuz, think that oil is going to spike. And if you look at some of these big geopolitical actions, the market's decline is shallower and shallower because every time they seem to snap back faster than people think they're going to. And it doesn't appear to be, you know, there's always like, okay, it could be World War III. Yeah, it doesn't feel like it. Unless there's Chinese troops involved or nuclear weapons involved, it doesn't feel like that. And it strikes me that the, I'm not making a judgment whether it's a good or a bad idea, but the Trump administration is already signaling they want, you know, they're 48 or 72 hours in, and they've already signaled that they want to declare victory and leave.

59:24Scott Galloway:That's how I read their most recent statements, which means that I don't see what would be in Iran's interest to try and destabilize things more at that point. I think they would rather just survive, get through this, hunker down, and then go from there.

59:47Steve Eisman:Well, that to me is the wishful thinking.

59:48Scott Galloway:For me, that's not wishful thinking. I would like to see the empire of Persia reemerge and have it be more neutral or pro-West. Unfortunately, I think the incompetence, and I'm becoming geopolitical now, but the incompetence demonstrated by the Trump administration without even thinking through the ability to answer why, why now, and what's the off-ramp, they clearly hadn't thought to do these issues, and they've been forced to answer them real time. And we look like, in my opinion, he looks like a fucking idiot. America's lost a lot of credibility. And the real, in my opinion, the opportunity for really productive change here is probably going to come and go as quickly as we attacked and then left.

1:00:31Scott Galloway:I just don't think this is going to have much impact on the market over the medium or the long term, for better or for worse. But more importantly, back to me, back to me, Ed. So I know you're wondering what I was doing in 07 and 08.

1:00:42Steve Eisman:I was. I want to hear this. Oh, thank you.

1:00:45Scott Galloway:It's like we're on a date and you're pretending to be interested in me.

1:00:52Scott Galloway:So I was reinventing myself yet again, after the Dodd-Bomb implosion, I'm like, okay, this internet thing maybe isn't working out for me. And I moved to New York and I was a professor making 12 ,000 a year. And I thought I need to make some money. So I thought, okay, I'm angry. And I just got through a proxy fight at my old company, Red Envelope, so I thought, I know, I'll be an activist investor. And I raised a bunch of money and I bought a big stake in Gateway Computer, made a little bit of money there. And my capital sponsor was a guy named Phil Falcone with Harbinger Capital. And Phil was one of the, he's probably the least mentioned of the three or four hedge funds.

1:01:29Scott Galloway:The guy that got all the mention was a guy named John Paulson. But basically Phil made, Phil bet a billion dollars on these credit default swaps. And he made six or seven billion. And then he was kind of the golden boy. He made this huge bet and his AUM went from a billion to 20 billion. And I used to come in and pitch consumer and tech ideas. And he said, I'm going to give you an office here and you can come in one or two days a week and just pitch me and the team on ideas. And then basically the whole world imploded. And what was it? Oh, eight and oh nine. And my son had the poor judgment to come marching out of my girlfriend.

1:02:07Scott Galloway:And I remember like I remember that was a very stressful time. and I bought, I convinced him to give me$600 million to buy, become the largest shareholder in the New York Times. And I was gonna say, okay, you need to divest of all these stupid assets you own. You're on the seventh tallest building in America. You're headquarters, you own 70 % of the Boston Red Sox, all these shitty little newspapers, about.com, and we're gonna double down on digital. And I thought the thing was under price of 15. And within like four months of making this massive purchase and going on the board, basically forcing my way on the board, the stock was at three bucks a share.

1:02:43Scott Galloway:and I managed to lose a half a billion dollars or$400 million of other people's money in like four or five months, just about the time I decided to propagate. And that was such a stressful time. And people of your generation, I hear all these, I don't want to call them sob stories, but fears around jobs, getting out of college and everything, and the economy's not, you know, the market's not going up. When you're sitting in a board meeting of the New York Times, I'm not exaggerating. They're like, if we don't raise money in the next 60 days, we're declaring bankruptcy because our advertising was$300 million a month, you know, January, February, and in March, it's going to be 22 million.

1:03:33Scott Galloway:The great financial crisis, people just

1:03:39Scott Galloway:stopped advertising. They just stopped spending. It was like, and it was like, okay, if we don't figure out a way to raise money, we ended up raising a bunch of money from Carlos Slim, of all people. If we don't raise money fast, the cousin, Arthur Sulzberger, he's going to be the cousin of the last New York Times. It's going to be bumped into bankruptcy and we're going to lose it. And every company I was on the board of involved in, it was just like, I mean, you don't realize how fast things can flip. And people your age have never lived through that. And they get, I don't want to say they're not resilient, but they think, oh, I mean, youth unemployment's at 10 % right now.

1:04:16That's a tick up, but it's not.

1:04:19Scott Galloway:Historically, that's about average. That's not. And when I got out of business school in 92, only 40 % of us had jobs at graduation. Anyways, my point is, it was, I look back on it, it was such a wild time. It was so strange to be constantly on board calls trying to figure out, like, are we going to go out of business here? And of all these boards, but I was working at this hedge fund of this guy who got very famous making this incredible short trade. And then effectively, slowly over the next few years, went out of business because he had this incredible risk appetite. And eventually that catches up with you.

1:04:56Scott Galloway:but i was living in new york uh had two babies and lost almost everything again yeah it was a very stressful time for me ed i'm like i can feel my heart i feel my blood pressure going up just thinking about being 40 and broke again with but now having like kids that are demand that I feed them and send them to school. Not anymore, baby. Not anymore. We'll see. The podcast era has begun. Yeah. Problem is I'm shrinking again. I don't know if that's an moment of bad things to come. Read us out, Ed. I'm going to go start drinking.

1:05:41Steve Eisman:This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carty. Our research team is Dan Chalan, Isabella Kinsel, Chris Nodonohue, and Mia Silverio. Jake McPherson is our social producer. Drew Burrows is our technical director. And Catherine Dillon is our executive producer. Thank you for listening to ProfG Markets from ProfG Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

1:06:18In kind reunion As the world turns And the dark flies In love, love, love, love

1:07:04Scott Galloway:Thank you. Thank you.