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

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AI can fix healthcare.

I'm Henry Blodgett, and this week on my show Solutions,

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and what it means for our future.

Dr. Wachter was not expecting to be an AI optimist.

What convinced him?

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This week on Nettworth and Chill,

I'm taking you inside my sold out New York City Booktour stop

for my brand new book Well and Doubt.

I sat down with the hilarious Heather McMahon

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Listen wherever you get your podcasts

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Today's number 20.

That's the percentage of British people

who have come up with a business idea at the pub.

True story yet.

I've been reading a lot about the downsides of alcohol ad

and I finally decided to do something about it.

I've decided to stop reading.

Listen to me.

Markets are bigger than what you have here.

There's a structural change in the world.

If you should cash, it's trash.

Stocks look pretty attractive.

Something's going to break.

Forget about it.

Here's a question.

Have you ever come up with a business idea at the pub

or at a pub?

I feel like you probably have.

God, I've had so many bad business ideas.

Is that where you came up with old folk?

Oh, you know that old folk.

That's very impressive.

I tried to roast you there.

I can't tell if it landed.

What did you about coming up with a bad business idea

at a bar?

That's right.

Well, here's the thing.

I'm going to New York to get my physical

because I belong to one of these high-end concierge places

where they bring you a cobb salad

before they have some guy stick two fingers up your ass

and tell you to cough,

which is worth 120 grand a year right there.

Oh, boy.

Oh, boy.

Anyway, so I'm getting,

and I know what they're going to say.

There's going to come back and say,

oh, you know, on the whole, you're pretty good.

You need to drink less.

I'm like, no, not happening.

I feel like you have been drinking a little bit less.

In fact, when you and I got a drink,

I noticed you did not get a drink.

Yeah, but you're not worth it.

You're not worth it.

If you had bigger tits, we would have been parties.

By the way, speaking of big tits,

I think height and men as the next is the new big tits.

What do you think?

Height and men?

Yeah, hundred percent.

Hasn't it always been?

Not as much.

I think that online dating has distilled things

down to some anodine metrics

and that people have decided that if you're over six feet,

specifically women,

that's an attribute.

And only I think about,

I was reading somewhere.

If you're over six feet and make over six figures,

that's like eight percent of the population.

I'll be interesting to see if height augmentation

becomes any breast augmentation of people

keep on extending their shins and their limbs.

I know a lot of men are putting some,

what do you call them in their shoes?

Lifts?

Lifts.

That's right.

Would you ever do that?

I mean, you're already a pretty tall guy,

let's say you were five, six.

Would you wear lifts or would you consider something like that?

Um, I guess, I don't know.

I would you?

No, I don't think I would.

But I'm interested by how more socially acceptable

it seems like it's becoming.

Maybe I'm getting the completely wrong idea

of social media,

which is just a total misrepresentation of everything.

But I've seen people talk about it online,

which makes me think maybe people are actually doing that.

I find it a little bit insane, but maybe it isn't.

I don't know.

How tall are you, Ed?

Six, three.

You're taller than me.

That's what we have to look forward to.

I used to be six, three.

And I'm shrinking.

You start shrinking as you get older.

Oh, that's right.

You're height shrinks, but your prostate gets much, much bigger.

And you also developed this incredible ability to grow hair

from your nose and your ears.

So keep in mind that that's exciting.

Yeah.

Yeah.

Let's look forward to it.

Yeah.

What else is going on, Ed?

Not very much.

I'm going to California this week,

which will be interesting.

And then we've got South by Southwest,

which I didn't realize is literally next week.

Very excited.

I was looking at the calendar.

I was like, OK, what have I got coming up?

We literally have our live show next week.

I completely did not really think about that or consider that,

but I'm very excited.

I'm excited too.

What days are we on the main stage?

Main stage, March 14, 10am.

Be there, we'll be square.

It'll be very exciting.

That's me, how you're taller than me.

OK.

Q lifts.

All right, let's get into the stories today.

What's going on, my brother?

Let's do it.

Let's do it.

We are speaking with a Wall Street legend, Steve Iceman,

investment analyst, portfolio manager.

And also, you know him from the movie The Big Short,

where he was played by Steve Carell.

Steve, thank you very much for joining us on Prof. Markets.

Thank you.

So many people know you as the guy who was played by Steve Carell

in The Big Short, one of my favorite movies of all time.

You're also known for predicting the 2008 financial crisis

and acting on it.

So we want to get your views on what's happening in the world

right now.

We don't have a subprime role.

Wait, is something going on?

That's right.

So we've got a lot going on.

I guess we'll start with this.

Based on what you're seeing today, what are your greatest concerns?

The war is obviously a great concern to all of us as human beings

and Americans.

I don't think that the war itself, long term,

is a major, can have a major impact on the market.

Because at the end of the day, the greatest superpower

in the world is going to defeat Iran.

I mean, that's inevitable that what I think people

are probably just beginning to realize today

is this is not going to be a two-day affair.

It should be a two-day affair,

because if Iran was run by a normal government

that had the interests of its own people at heart,

they'd have surrendered 24 hours ago or 48 hours ago

because there's no way that they can win.

They're up against the greatest superpower in the history

of the world since the Roman Empire.

But this is a regime that is essentially a death cult

and doesn't have the same motivations as a normal regime has.

They view the death of their own people,

the martyrdom of their people

as a sign of their own sacredness and righteousness.

And therefore, when you think that way,

you can absorb a lot more pain

because you see death as a virtue.

So it's going to take longer than a couple of days

to decapitate this regime.

And I think people are probably just beginning to realize that

and that's why the market's down again,

yesterday after having rallied.

Because yesterday they thought,

oh, this will be over soon, today they realized

that it's not going to be over that soon.

Yeah, this seems to be the disagreement

among the markets right now.

I mean, regardless of what your views are on the war,

on the potential regime change or on Iran itself,

I mean, the question seems to be,

will this mean more certainty or less certainty?

And we're seeing that reflected in prices.

We're seeing that reflected in the price of oil,

which didn't go up dramatically, but it did go up

because most of the oil is coming out of the Strait of Hormuz,

which is right in the region.

And so there's some uncertainty there.

I guess my question for you

are someone who has seen crashes,

who has seen crises, who has predicted

one of the greatest moments of uncertainty of all.

What does this mean for certainty and for stability going forward?

Look, my hope long term is that the Iranian regime

changes in the Middle East is remade

and things are much better.

But we're not going to know that for weeks.

And but regardless, this is not,

whatever the eventual resolution here is,

it's not going to be a long-term impact

on the global economy in my view.

Whatever the eventual resolution is going to be.

Why is that?

Because whatever happens,

the Iranian regime will change to some degree or another.

And things will settle down.

You know, I don't know who's going to run Iran.

Nobody knows who's going to run Iran.

But it's not, and obviously he's not going to be

the Ayatollah Khameini, you know, he can't, he's dead.

So whoever runs it is probably going to be somewhat more amenable

to the United States.

And I don't think President Trump is going to allow someone

to take over who's not more amenable to the United States.

How much more amenable we don't know,

but things will be better.

How much better?

I don't know.

It'll be to four weeks to sort itself out.

And by that time, all prices will be back down.

So in other words, this doesn't change your investment thesis

or your investment strategy at large, not by a single dollar.

Part of what I would wrap your thesis in is that it's,

the things you're expecting you're worried about

are usually the things that get you.

It's the things that people aren't talking about.

Are there any risks below the surface

that you don't think people are,

risk that there's asymmetric downside

in terms of the attention they're getting?

What are the risks you see that people aren't pricing

into the markets right now?

I think the two biggest long-term risks to the market

by far are related to AI

and related to private equity and private credit.

You know, in terms of AI,

the risk that I don't think is realistic

is some nightmare scenario where you're going to wake up one day

and everybody's going to stop buying Nvidia chips.

I, that's not possible,

at least not any time within the next year.

And the reason why that's not possible

is just because, you know, last year,

all of AI infrastructure spend was $450 billion.

And this year, if you just look at Amazon, Google, Meta,

and Microsoft, just those four is $650 billion.

I mean, these are crazy numbers.

So, and I'm not trying to justify them,

but I'm not spending the money, they're spending the money.

So, when you're going from $450 billion total

to just $650 billion just by four guys,

I'm not particularly worried

about whether Nvidia is going to have another good quarter.

That's, that's not the risk.

There are some people out there who think

that the entire LLM enterprise is flawed,

and I've spoken to them.

And they may be right in terms of that

it's not going to create artificial general intelligence,

but I think there's enough evidence out there

that everything that's being created

by people who are doing AI has value.

The question is, how much value?

You know, that so much money is being spent.

Are the returns that these companies are going to generate?

Are they going to justify those returns?

I suspect not, I suspect,

and it's way too early to make that prediction

because we won't know that for a year,

but if I had to take my life on it,

I'd say we'd have some kind of replay

where, you know, in the internet bubble,

the first generation of internet companies basically failed,

and it was the second generation of internet companies

that took us on to glory in terms of the value of the internet.

So, we could have a situation where, you know,

companies like AI and Anthropic fail,

and then there's a recession, and then you come out of it,

and the companies that emerge afterwards

are much stronger, and that's one possible scenario.

And the other thing that I worry about greatly

is the tremendous growth in private credit

that's been created by private equity,

and that a lot of that credit is in captive life insurance

companies that are owned by private equity.

And this is a $2 trillion market,

all the loan growth in the United States,

since the great financial crisis has not occurred in the banks.

The banks have had very little loan growth for the last 17 years,

with only a few exceptions.

Almost all the loan growth in the United States

has taken place in private credit.

Now, we have not had a credit cycle in 17 years.

So, again, this is, you know, if there's gonna be a credit cycle,

and there's some pretty good evidence now emerging

that we're starting to have one, how bad I don't know,

but whatever problems that will occur,

I think will occur in private credit.

How bad those problems will be, no one knows.

You know, there's no data.

You know, one of the difference between

talking about private credit now

versus talking about subprime loans back then

was, subprime securitizations reported their data

to Moody's and S&P every month.

So, if you spend, 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 data-based,

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

of 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.

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.

I just want to double-click on both of 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 to pick on open AI.

Okay, so here's a company that just raised $100 billion.

At evaluation, I think it was $850 billion.

A 700, I mean, when you start to get to these numbers,

it's starting to lose, you start 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 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.

That's the risk.

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 BIS dev guys,

the blue owls, the TPGs, the KKRs of the world?

Well, they would say that 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 doing 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.

You know, I was sort of amused

when ServiceNow reported about a month ago.

You know, 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.

There isn't any, we 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.

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 ahead of,

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 Satrini 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.

And then there's the other side of this,

which is the private credit issue,

which I have to say,

AI, 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.

It's actually worse than that.

OK, place, because everything I've said so far is bad enough.

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 had 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.

So normally, when you reinsure,

you reinsure part of your book with a third entity,

and you have an arms 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.

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.

And if you went to Blue Al and said,

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.

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 pot 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 Al, 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 Al goes out of business,

then whatever, but I guess the next question becomes,

is it bigger than that?

Are there ways where this could materialize

and affect all of us?

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,

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.

That's why the great financial crisis was so bad.

And principle here, it won't get as bad

because the banks aren't the lenders here.

It's the blue aisles of the world and the KKRs

and the piles of the world.

So mostly the people who would be heard here

would be institutional investors.

The caveat that I just gave you

is that some of this stuff is in life insurance companies

where they're individual policy holders.

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,

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.

We'll be right back after the break.

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After decapitation strikes against Iran's leadership,

what can we expect next in the escalating war?

The big question is, if there is going to be

a next strong man in Iran, what kind of strong man

will that person likely be?

I don't think that there's going to be another powerful cleric,

supreme leader.

I'm John Feiner, and I'm Jake Sullivan,

and we're the hosts of The Long Game,

a weekly national security podcast.

This week, we sit down with Kareem Sahjapur

to discuss what to expect in this next phase of the war against Iran.

The episode's out now.

Search for and follow The Long Game,

wherever you get your podcasts.

We're back with prophecy markets.

One of the most impressive things about

where you and your colleagues did was you saw the rest

that other people weren't seeing,

and you figured out the instrument to leverage that offer,

that dislocation.

What's the trade here if you think

that private credit is riskier than people perceive?

The problem is that in theory,

you would try and buy a 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.

For example, I 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 has gone bankrupt.

The reason why Oracle's credit default swaps have blown out

is that the credit default swap market is extremely illiquid.

If someone, some hedge fund, like Elliot Associates,

decides, hey, 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.

Those stocks have gotten obliterated.

Curious, in terms of risks that we're not pricing in

or that we don't see, I'll put forward a thesis

and you respond that it's very difficult

to outrun multiple 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 is flat even after doubling 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

around, in the S&P, around what I'll call

this multiple contraction, your thoughts.

I don't agree.

One thing I've come to as a conclusion about market

so many years I've been doing that,

is that they're completely amoral.

Not immoral.

Amoral, they're completely different.

They don't, everything that you just mentioned,

is 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 contraction.

But as long as what happens politically

doesn't impact margins, revenue growth, earnings

per share growth.

And market don't care.

What about stability?

I mean, I think the argument from our platform managers

who are taking it out of America is that we just get,

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?

Nonsense.

Like I said, I think the markets are immoral,

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 and 2008,

I thought people would care what was going on

because people were financially being destroyed.

The markets in Carroll.

The only kid one profits went down, that's all.

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 that cause

and people to overshoot that

and exaggerate it in their calculations,

but wouldn't that still be part of the calculus?

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 want the college.

We all took Econ 101, you know,

economics as a, 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

and 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, and that's why the market went down

between, last year, between late February and April 9th.

And then it turned out it wasn't so bad.

It was that bad.

And so the market went back up.

So, you know, until, now there's some,

there's some sectors where it is hurt, you know,

like the Staples group, you know, it hurt.

And so, it's one of the reasons why Staples

performed very poorly last year

because they had marked, they had actual

margin compression on their products.

But other than a couple of sub-sectors,

it hasn't really seemed to have shown up very much.

The US economy still grew last year.

The whole, you know, the thing

that drove the US economy last year was AI investment.

Right.

And that's what's still driving the US economy.

That's why I'm so focused on it

because if, if there is a real slow down,

there's no question in my mind.

If, if I, if you could give me a day

and, and so on this day,

it became very, very clear that AI investment

was growth was going to get cut in half.

I tell you we're going into recession.

That, that, that, that, that's how much

the US economy is dependent upon that, right?

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%.

I'm glad you said that because I,

I thought I was having a, I thought I was having a little crazy.

I bought those three names, yeah.

That was, that was gutsy.

It hasn't been, it hasn't been great,

but I'm still holding strong.

I'll go to a second here of why.

Everyone's saying, well, these prompts

could put the businesses out of business.

Am I, 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 stripping.

I've been using Salesforce at every company, I grew.

And you can't see stripping Salesforce out of your company.

You just can't imagine it.

It's too difficult.

Yeah, these companies are very good at embedding themselves

in your company and the idea that all of a sudden

I'm gonna pass them on with coming up with prompts

to replace Salesforce.

Anyways, if, talk to me about the thesis

around going long, the SaaS companies,

and going short, the energy companies.

Well, only for this thing, I don't trade.

I am not a trader, I'm not a medium-term trader,

I'm not a short-term trader.

There's 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 are,

or as a trade will be lower in a couple of months.

That I agree with.

The software one is,

it's time I'm attempted for my own personal portfolio

to buy some of these software stocks.

I'm too afraid.

It's like catching a falling knife.

These things go down on,

like that thing that happened last week

will get that fantasy story that's,

I forget the name of the,

it's a training.

It's a training.

That was like, you know,

that was like reading,

I know that there's a clock novel,

you know, that 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,

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 gonna 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 gonna change the narrative.

That's the problem with buying those stocks.

But it's the same thing to start to think about buying them.

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 Iseman.

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 a good one.

I said, you know, part of the problem here

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 Iseman has already taken.

And, but I think it's funny,

but there's truth with this, you know,

people want to be the person who predicts

the next end of the world.

Let me say thank you to those people.

Listen, it wasn't such a pleasant experience

the first time around.

It was very aggravating.

And a lot of 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,

we 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 your current,

you're not going to be able to buy anything

in the store with your dollars.

So, by Bitcoin, that was 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 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,

where people don't know about the financial system

is basically everything.

The entire financial system of Planet Earth,

it's not just that the dollars of reserve currency

of the world, the entire financial system

of Planet Earth runs on treasuries.

You know, you've got a $3 trillion overnight repal 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, you know, 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 it's that argument is academic.

I think the question then becomes,

because you're one of the people who actually,

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 Germany 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?

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's going to end because government

is 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 realized 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.

That was the story.

And you could track it every single month.

When you're talking about some of these other thesis,

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,

tri-color first brands 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.

Just along the lines of the deficit,

spending seven trillion a year on five trillion in receipts.

Do you see that as an existential risk?

So how does it play out in terms of a potential trade?

I don't see it as an existential risk at all.

I think that US debt to GDP right now is 125%

something like that.

Japan's a 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, you know,

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.

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 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 to click Steve.

Yeah, I know I understand.

I list the world's going to end there.

Use that.

We'll be right back.

And for even more markets content,

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This is your fix.

I am your host, Stasi Schroeder.

Welcome to Tell Me Lies, the official podcast.

What's the most unhinged thing of season three?

Steven, because he's so evil.

I do think he is misunderstood.

You see everyone base consequences.

It's intoxicating.

The writers just know how to trick you.

There's always a twist in this show.

Tell Me Lies, the official podcast January 6th

and stream the new season of Tell Me Lies January 13th

on Hulu and Hulu on Disney Plus.

We're back with proggy 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.

Well, I actually find fascinating

until that, you know, whatever correction

we're having right now.

Let's go back to last year when the market was up a lot.

You had, what's amazing is you have two

counter narratives going on in the market.

You had the stock market going up, everybody.

The ra ra ra ra ra, 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.

And I thought that was, I think, one of the more

fascinating things about last year.

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.

I call this as believer, like I generally believe it.

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.

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 frickin' Rosetta Stone.

So the statement that, and here's where I disagree

with the efficient market thesis,

the information was there.

The entire fixed income world had that data.

They just interpreted it wrong.

Now, they saw the data getting worse.

It's all like they said to themselves,

oh, the data's getting better.

The data was not getting better,

but they, 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 fine.

And that assumption was that housing prices

have not gone down in the United States

on a national basis since World War II.

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 I still would be lost as 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 that 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% from point to point.

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.

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.

Yes, I think the hardest thing,

one of the hardest things for all human beings,

me too, to deal with, or paradigm shifts.

You know, you exist in a paradigm

that have 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 continuing,

continuously increasing leverage,

which is what the financial services industry's paradigm

was based on, people have,

human beings have tremendously difficult time

dealing with paradigm shifts, tremendous.

They don't, it's like a nightmare.

They don't want to deal with it.

See, 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 of the downside?

What does the film get wrong?

I'll tell you what I thought it got wrong,

but it turned out that they got right.

When I watched the movie the first time

and it came out in December, January,

December 2014, January, 2015,

I thought the character of Steve Cretel played was great.

It was incredible portrayal.

He should win in the Academy Award, God willing.

But that surely I wasn't nearly as angry

as he portrayed me today.

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 completely forgotten about it.

And in April of 2015, the financial crisis commission

did a data dump.

They literally disclose every single piece of paper

that they had.

And so 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 Cretel,

he got it right.

You are that angry.

I was.

Yeah, I got questions about the movie too.

My favorite scene was the sushi scene.

You, Steve Cretel playing you 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 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 CDOs

and he had the misfortune of having dinner with me.

Well, I love that scene.

I love the way the guy conducts himself.

My question is, I actually have two questions.

There's the sushi scene and then there's also the scene

with the real estate brokers and they're like,

you don't understand, he's not confessing.

He's bragging, right?

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 for the last 15 years.

And I think it may turn out that they're right,

that there are no problems.

And there's 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 it away.

Steve Isman is an investment analyst

and portfolio manager with decades of experience

in financial markets.

He's best known for his pivotal role

in predicting profiting from the 2008 subprime mortgage crisis

chronicled in the big short.

Steve founded and managed Emre's partners,

a long short equity fund focused on fundamental analysis

in 2014, he joined Newburger Berman

as a managing director and portfolio manager.

Currently, Steve Isman is the host

of the real Iceland Playbook,

a weekly financial podcast.

Steve, this was a pleasure.

We really appreciate your time.

Thanks very much.

Nice to meet you soon.

Thank you, real pleasure.

Yeah.

Edward, do you think...

I thought that was fascinating.

Um...

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,

like when is that moment going to occur again?

And it's not always clear to me.

And so I think what 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.

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 were to interpret it another way,

well, it would be a huge inconvenience to them,

to their companies and to their careers.

I do think that the water on is about to be

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,

I'm 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 objectives.

We heard that they,

it's clear that they hadn't thought through

what their objectives are,

but they laid out a series of objectives.

It's basically, as far as I can tell,

giving them a rip cord to just get out.

And the result will be,

I think that energy prices will stabilize.

And you already seen the markets that,

if you look at what's happening 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,

not as freaked out.

I actually disagreed with that.

Maybe we'll talk about it in another episode,

but I feel like pulling the rip cord 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 Hameini, 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,

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.

And I just don't feel fully convinced of that yet.

I'm not sure if it's stable or solved.

I think people, whenever they hear war

and 20% of oil flows through the Straits of Formos

think that oil is going to spike.

And if you look at some of these big geopolitical actions,

the markets decline is shallower and shallower

because every time they seem to snap back fast

when the people think they're going to.

And it doesn't appear to be,

there's those 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 gonna make a judgment

where there's a good or a bad idea,

but the Trump administration is already signalling they want,

you know, they're 48 or 72 hours in

and they've already signaled that they want to,

they want to declare victory and leave,

or that's how I read their most recent statements,

which means that, you know, 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 those hunker down,

and then, you know, go from there.

Well, that to me is the wishful thinking.

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.

I don't, unfortunately, I don't think,

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 offer amp?

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 has lost a lot of credibility,

and the real, in my opinion,

the opportunity for really productive change here

is probably gonna come and go as quickly as we attacked

and then left.

I just don't think this is gonna have much impact

on the market over the medium of the long term

for better 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.

I was.

I wanna hear this.

Thank you.

It's like we're on a date,

and you're pretending to be interested in me.

So, I was reinventing myself yet again,

after the dog, after the dog 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

in 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 again in Filthout Cone,

and with Harbinger Capital,

and Phil was one of the,

he's probably the least mention of the three or four hedge funds.

He got all the mention was again in 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 consumers

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 in the team on ideas,

and then basically the whole world imploded,

and I'm, what was it, O8 and O9,

and my son had the poor judgment

to come marching out of my girlfriend,

and I remember,

I remember that was a very stressful time,

and I bought,

I convinced him to give me 600 million dollars

to buy, become the largest shareholder in the New York Times,

and I was going to say, okay, you need to divest

about all these stupid assets,

you know, on the Seventh House building in America,

your headquarters, you know,

70% of the Bosnian Red Sox,

all these shitty little newspapers about.com,

and we're going to 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,

and I managed to lose a half a billion dollars,

or four hundred million dollars,

of other people's money in like four or five months,

just about the time I decided to propagate.

And it was, that was such a stressful time,

and people of your generation,

you know, I hear all these,

not only calm 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 three hundred million dollars

a month, you know, January, February,

and in March, it's going to be 22 million.

The great financial crisis,

people just stopped advertising.

It just stops when 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 Salzberger,

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 involvement,

it was just like,

I mean, you don't realize how fast things can flip,

and people of 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 is a 10% right now.

That's a tick up,

but it's not historically, that's about average.

That's not.

And when I got out of business school in 92,

only 40% of us had jobs, a graduation.

Anyways, my point is,

I looked 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 about 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.

But I was living in New York,

had two babies,

and lost almost everything again.

Yeah, that was a very stressful time for me, Ed.

I didn't 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 going to 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 old man or bad.

Thanks again.

Read us out, Ed.

I'm going to go start drinking.

This episode was produced by Claire Miller,

and Alison Weiss,

and engineered by Benjamin Spencer.

Our video editor is Jorge Carti.

Our research team is down to line.

It's about a Kennesle Christian,

who don't know you, and Meersal Vario.

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Drew Boros is our technical director,

and Catherine Dillon is our executive producer.

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