Hey, it's Steve Eisman. Welcome to another episode of The Real Eisman Playbook. We get a lot of different types of guests on this show. We get sell-side analysts, we get buy-side analysts, we get authors, we get economists, we're getting Substackers, but it's nice to sometimes get someone who has a background that's similar to mine, who has been an asset manager and is now a podcaster and is expressing opinions like I've been expressing opinions. And that person is George Noble, who was once a portfolio manager at Fidelity and now is a podcaster, newsletter writer. And we're going to have a very broad-ranging conversation about a whole range of topics. And when we're done, I'll be back with some thoughts.
Hi, this is Steve Eisman and welcome to another episode of The Real Eisman Playbook. Our guest today, George Noble, who has been here before, who has been a portfolio manager, he's now a podcaster and a newsletter writer, kind of like me. So George, welcome back.
It's always a pleasure to be here with you, Steve.
So, not that there's much going on. But let's start. We got so many things to cover. Let's just start with the latest news. Give me your thoughts. I'll give you my thoughts about the whole Treasury Secretary Scott Bessent trying to, for lack of a better term, repress interest rates. What are your thoughts about this?
Before I answer that, it's just one of the lines I always use. It's the quote from Vladimir Lenin where sometimes years go by and nothing happens and sometimes weeks go by and years happen. Okay, we're in one of those right now. All right, we're also in one of those periods where you and I are both stock pickers, but there are times when you really have to pay attention to macro and there are times when the macro is rather quiescent. Right now, we got so much going on with the oil price, with AI, with the concerns over the deficit. There's just a lot of moving parts right now.
So, over and beyond just I'm going to buy Stock X.
Correct. And so, and a lot, and you know this Steve, sometimes it always helps to have the force with you, the macro either neutral in your favor like rumor has it you once did financials. Okay. So much better that you're in an environment where you don't have to think about interest rates. It's either flat or going down. All right? But when you have a gale force hurricane in your face, say you want to own home builders or a mortgage guy and rates are going up and to the right, it's hopeless, right? So there are times when you have to really pay attention to the macro. And Michael Kantrowitz who I believe you know has always said most groups, most stocks, their behavior can be described as a combination of various factor influences. Are rates going up or down? Is the dollar going up or down? Is the economy slowing or increasing? Right? So I tend to use that framework a lot of looking at stocks. But anyway getting to Scott Bessent, look, he's in a very tough position.
Let's have a little mercy. Yes. And a little sympathy. You know, we could be very... I know what word you're looking for. No, no, no, no, no. You know, the word I was about to use was rachmonus.
To explain to the viewers is Yiddish for sympathy, empathy. Correct. Correct.
So, so we'll get critical. We will have a little rachmonus in a tough spot.
Correct. And someone asked me a few weeks ago, couple few months ago, what would I do if I were, what advice would I give Scott? What would you do? What advice will I give Scott? They said resign. It's like, it's like, you know, everywhere you look there's no good options here really.
It's kind of like sometimes in chess you're in a position where you have no move.
Correct. Correct. And so I think you and I have a similar worldview in this regard. And I don't want to make it political. Your job of mine is not to take sides. It's we're just trying to deal with the cards that are turned up. Like what do we do? And the situation we find ourselves in, like it's a group effort, all the accumulated deficits, the left did it, the right did it, you know, we could argue there's plenty of blame to go around. I don't want to get into whataboutism, god forbid you say something critical about one side they'll say what about the other side. So in any event, he's walking into a very difficult situation.
And it's not just the deficit because as you know the explosion in debt issuance from AI is crowding out Treasuries.
And so rates have this sort of push to them that if there was no AI story, rates would probably be 40 basis points lower. I just made that number up, something like that.
That's fair. And you and I were exchanging emails before we went on the air and I think I wrote something to the effect, capex boom meets runaway deficits. You know, okay. So, and what's really going on right now, we'll get to Bessent in a second. It's not about the Straits of Hormuz. It's not about the latest CPI number if you talk about the bond market. Okay. Those who breathlessly hang on every CPI number like it really matters.
We're talking about... But by the way, just so people know, there are people like that. Who trade bonds and they look at the CPI number like it's Moses coming down with the tablets.
100%. And I'm going to mention names. I'm reminded you should praise specifically but only criticize generally. Well, I'm going to suspend alternate side street parking regulations for this discussion. Okay. I love Truflation. I have no problem with Truflation. Truflation is a service. They measure like 10 million different prices and they try to come up with their own estimate of what inflation is. It's...
As an alternative to CPI.
Yeah. Okay. Okay. And they do good work. So, I'm not critical of Truflation. That's not the point, right? What I'm critical of is I have these monthly calls. This is going to turn into the Yiddish hour. They have these macro yentas come on. All right. And they're going on and well, you know, it's like you and I got to look at the replay. Well, the CPI came in at 3.8 instead of 3.6. And it's like, who cares? It's like, you know, and they're just fixated on these monthly CPI numbers. They're totally missing the plot. All right. The plot is, and listen, no one knows financials better than you do and interest rates and all the like, we've been in this environment, it's now changed, we're going through a regime change, all right, where when we were post-GFC, no matter how much money they spent, no matter how much more money got printed, it didn't really matter, almost to the point, you and I discussed this the last time I believe, almost to the point you might believe MMT actually makes sense, it actually is legit. But as Louis Gave likes to say, the policy responses, the impacts of those policy measures are much different in a deflationary environment. We're worried about a bust as opposed to when you've got binding constraints. In other words, you know, we're running out of, shortages of things. So now if you go to cut rates, if you go to stimulate, it's going to have a real, it's real inflation because you got bottlenecks.
Correct. Okay. And I think I remember reading some last year or two years ago. I think it was Jim Bianco who said it. I shamelessly name drop but I want to give credit where it's due because I'm full of criticisms as well. The market, you know this Steve, the market was constantly, up until like 2021 thereabouts, post-GFC, the market was constantly overestimating the extent to which inflation would pick up.
Okay. And inflation never came like people thought. And you know this and actually I wrote my senior paper at Yale on, Bill Brainard, my senior adviser, on the efficacy of forward markets in predicting interest rates. They do a horrible job. So when people say, 'Oh, look at the bond futures,' ignore that. Okay? They're no better than the weatherman. All right? Anyway, the point is the market constantly overestimated inflation pre-COVID and since 2022, the market's been constantly underestimating inflation because we have fiscal dominance, right? And we have constraints and so it's a much different environment. So Bessent, let's talk about what you think he's been... just give my view quickly and then you go.
He's in a tough spot, but leave that aside. And we could have a debate about, you know, yes, the entire federal debt is 40 trillion. We could talk about how important that is or not important that is. I mean, we could go back and forth on this till we're blue. Leave that debate aside. I think there's no question there's upward pressure on rates mostly because of AI, not so much the deficit because the real change is the AI. You're talking about 40 trillion in US government debt. I mean, the number's so big it's hard to even get your mind around it. And he's talking about buying some debt that it's like, you know, it's like trying to kill a whale with a BB gun.
Well put, Steve. It's like bringing a water gun to a real battle. A real battle, right?
That's bad enough. What's worse, he's got a credibility issue now because if let's say just for example, in two, three weeks rates go to five. His credibility is shot.
Well, in my view, it already is happening. I mean, you know, rates went down for a millisecond and we're meaningfully higher now than we were before he opens his mouth, right? So, so he's in a tough position. But I'll tell you the issue I have with Scott. I'm going to keep this source in the federal witness protection program. Okay? I know someone who used to broker to him, who used to be, was a, had him as a client, institutional equity sales guy. Okay. So this is an institutional equity salesperson who used to serve Bessent when he ran his hedge fund.
Correct. Okay. And known Bessent for a long time. Used to like Scott, respect Scott, but he's now shaking his head. This is not the Scott Bessent I once knew. All right, that initially he probably was saying the things he was saying because he knows who his boss is and he has to carry water for Trump. We're not getting into discussion about Trump, but he's taken it to a whole another level now. And my source suggests it's almost at best, Bessent really believes what he's saying. The smugness, the arrogance, and I would say the incompetence. Okay. You and I were speaking earlier before we started about Stan Druckenmiller's rebuttal. I mean, if we're playing pickup basketball in the Rucker League and you got Scott Bessent on one team and you got Druck on the other, I know who I'm going with. All right. You know, I know Scott marginally. I don't want to speak... I mean, he's in a very difficult situation, but he can't be held accountable. In fact, we're in a bad situation, but he can be held accountable for the lies that he is telling. All right? And those lies are what?
Oh, when he talks about, you know, how much oil is going through the strait or did you see he was with the gas line the other day? No pun intended. He was like everything would have been okay except the Ukraine got invaded and that's why gas prices went up. I mean, it's just one exaggeration and smear job after another. And for those who are Trump supporters, I don't want to make this political and then you get into whataboutism. I don't want to get into whataboutism. You mean if you start asking me what about the Democrats, I can do that, too. I'm a fierce middle-of-the-road kind of a guy. All right. As I think you are as well. And so I take issue with the mistruths like he's either misguided or he's lying. And I think he's smart enough to say he's not that misguided. And to your point about bringing the water gun to the fight, it's like what are you doing? And the bigger point out of all that as well, you're a free markets guy by trying to suppress rates, which they're not, it's not going to work. Okay? I mentioned to you he is Norman Lamont. Okay, this is the UK government under John Major. It's kind of funny. It's so rich. It's role reversal. Okay, so you know he was working for Soros when Soros and Druck attacked the Bank of England and they made a fortune doing it. And by the way, sidebar, many try to credit Bessent with being involved in that trade. He was a 28-year-old junior.
He had nothing to do with it. Okay, this is also, we're going to get to narratives later in the conversation, but this idea that he somehow was responsible for that trade, nothing could be further from the truth. It was me and Soros.
It was Druckenmiller and Soros, right? But anyway, for those that weren't around then, aren't as old as you and I are, in I guess it was '90 or '91, I forget the exact year when Soros figured out they're trying to maintain, you know, the sterling at an artificial rate. And Steve, you know this, when there's a wrong price, markets have a way of attacking, right? Okay. So when I saw Bessent open his mouth a couple weeks ago, I was like, 'Ding, ding, ding.' Okay, he's let the... it's basically exactly what Druckenmiller started to say as well. Let the market decide what the right price is. Okay, now he's not bringing enough firepower to really influence. He's trying to engage in what they call open mouth operations. All right, but intervention and stuff like that, you know this, Steve, it only really works when the fundamentals are with you, right?
Okay, it's like when the Japanese try to intervene in the currency, only do it when the fundamentals are right. Come to Japan a bit. We will. Okay. So, let's move on to a topic that I must write about every single week and I know you write about every single week and I discuss every week and you discuss every week, which is the whole AI ecosystem. So, let's play, you show me yours, I'll show you mine. Okay.
Steve, see Steve, my capex is bigger than your capex.
Exactly. So, exactly. So, I mean, again, another topic that we literally could talk about for the next four hours. Let's try and shorten it. Give us your shortened version of the whole AI debate.
Let me get to the money page. All right. For the bear case. Okay. Show me the ROI. All right. Another Yiddish term coming. We can hack into a China all day long about semiconductor demand and this and that and everything else. Okay. It's all being funded with funny money. Okay. The fact that Nvidia has to announce, you know, what was it, a $250 billion package for OpenAI to fund what they're doing. The fact that they're having to do that tells me all I need to know. All right. And again, rumor has it you were involved in some... I texted you. The AI boom, it's kind of like dot-com and subprime all merged in one because you got unsustainable phenomenon. In your case, it was housing. Now it's the values didn't make any sense. With this OpenAI, with the AI, it's the same thing. Show me the... So again to answer your question, show me the ROI because eventually if the ROI is not there, the funding is going to dry up and we can go on all day long. You know, you come out with a model which is 50% faster and Anthropic comes out with a model that's 50% cheaper and blah blah blah blah blah. This is, you know, and the Chinese are coming out every week with a model which is 95% less and it's cost cutting at large.
Okay. And by the way, best name out there except for Meta's model is called Llama, which is great.
And you know what's happening with these guys? They're so, and you see this on X and in the public domain. People are so in the weeds in technology, this version, that version. Okay, they're missing the point. The point is AI is set up to fail. Okay. Julian Garren, who you should have on your show from Macro Strategy in the UK, we'll talk about him later. Okay. He's made the calculation that the malinvestment is 24 times what we saw during dot-com. So you can say whatever you want about, well, you know, I used AI to write my summary or this, use AI, I use AI. That's not the issue. The issue is it's just going to be an application which has a very narrow technology, which is a very narrow application. Maybe the market's worth 50 or 100 billion dollars. I have no doubt the really high-powered needs will use it. Okay. But then for the rest of us, we don't. It's good enough, the Chinese model is good enough for like 95% of us at 95% less cost. All right? So when people say, 'Oh, George, use AI. It's very rich. You're criticizing.' It's not the point. Just like with the internet, Steve, one thing to say, 'Oh, gee, you're bearish on internet stocks, but you use the internet.' I mean, I recall I was interviewing Peter Berezin from Bank Credit Analyst, another guy you should have on your show. He pointed out that the bullish forecasts on the internet back in '99, 2000 were right. Internet traffic compounded at 43% a year for the next 25 years. It went up by like 25 million percent. Some crazy number, right? Didn't stop Global Crossing and all the rest of them from going bankrupt. Okay, that's what I think we're dealing with here, right?
So my synopsis, I think about it like as a chain. So you've got Nvidia selling the chips. Nothing wrong with selling chips. You've got the hyperscalers who buy the chips. Nothing wrong with somebody buying chips. Where it starts to get squishy is something like 70% of AI revenue of the hyperscalers is just from OpenAI and Anthropic and that's about 25 to 35% of their entire cloud revenue. So basically if you follow the chain down, the entire ecosystem is dependent upon two companies who lose, to say that they lose billions is a euphemism, and one of them I think is in trouble, which is OpenAI.
And so Anthropic is going to go public. They, I think they need to get their S-1 out fast because token maxing is ending.
That's done. Yeah. And so I don't think they want to go public having reported third quarter numbers. They want to go public having reported second quarter numbers with token max at its peak. But they're in better shape regardless. They're in better shape than OpenAI. And if OpenAI gets in real trouble because the entire ecosystem is just dependent upon two companies, the whole ecosystem is in trouble.
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Steve, can we take a little detour here? I want the hunter to become the hunted. We do a little role reversal here. You're going to enjoy this.
I want you to go back to GFC and all the work you were doing on financials. And we know accounting is a very imperfect science. It's an attempt to portray the economic reality of what's going on. Correct. But often times it has limitations. So you can have related party transactions, you can have VIEs, controlled interests, etc., etc. So I'm sure part of your work, you were looking to see what's the relationship to all these different entities. Okay? So if I said to you, Steve, there's a home builder, okay? They're selling all these homes, but you know what? Price appreciation's starting to kind of... Yeah. And so they're kind of getting stuck a little bit. So what they're now doing, okay, is they're lending all the money to the would-be buyers. All right. At ridiculous, at uneconomical interest rates. So they're extending a mortgage at zero, 1%, let's say, right? Okay. And they're not accruing the difference between the market rate, the mortgage should be seven, right? And they're doing it at zero. All right. And they're booking the whole thing as income, right? And you can see what's happening. This car crash is all right. That's what's going on here. How would you respond to that? To me, it's the same thing. All this related party transaction, this is not a healthy situation. So drawing on your past experience, now you're in the hot seat. Okay. What do you draw from your, forget about it, what do you draw from, you've done financials forever and VIEs and all this sort of stuff. What do you draw from this based on muscle memory, pattern recognition from you've seen this before?
I mean the circular financing kind of drives me crazy but I'll turn it around. If by some miracle Anthropic and OpenAI became insanely profitable, it wouldn't matter because the loans would be good. The circular financing just tells me that there's probably something wrong, but in and of itself it's not necessarily the issue.
Correct. But what you wouldn't do, you wouldn't blindly say, 'Oh, look at the earnings, look at the P/E.'
You know, not at all. I mean, I give an example on something that Nvidia, when they reported, that I still to this day can't understand why no one has commented on this other than a few Substackers, which is Nvidia's revenue in the quarter that was just recently reported was up over 100%. But if you go in the Q, it says that 70% of accounts receivable is from five accounts. I mean, think about it this way, that the largest company on planet Earth basically 70% of its revenue comes from five customers is very frightening.
Yes, that's frightening. But as you pointed out, the receivables piling up, the loans, the whole deal, if it was a healthy system, if the banks thought this was a good business, or private credit on its heels, if there were healthy lenders that thought these are good credits, they'd make loans.
They'd make loans, but they're not doing it. Why? Right.
They're nervous, of course. Right. Okay. All right. Let's move to a topic that you're more familiar with than me because I've never... You know how some people have, everybody has mental blocks about certain things.
My mental block is the dollar-yen trade. I don't understand it. I don't understand what's going on. I don't understand why that trade is a measurement of risk. I know something's going on. Educate me because I just don't get it.
Well, you're giving me too much credit. I mean, I've only been following Japan for 40 some odd years and...
Well that's 40 some odd years basically longer than me but Steve as we know those who've tried to short the JGBs, actually it's been a great trade now but for years they call it the widowmaker trade like if you were any self-respecting hedge fund manager and you hadn't lost money trying to short JGBs like that's a sign of, you know... Okay so so I can live without such a badge of honor by the way.
Exactly, exactly. So any rate, the yen, you know, Captain Obvious checking in, the yen continues to go from weakness to weakness. Been many calls of the turn.
Explain what the trade was. And explain what's happening to the yen now. What's happening to rates? Because I don't really understand it, but I know a little, but I'm sure my audience could really use the help.
Okay. So, this gets back to actually gets back to accounting in a certain degree. Say you're a Japanese life insurance company or Mrs. Watanabe, the proverbial housewife that's speculating, right? Money's yielding you nothing. You put your money in the bank, it's half a percent. JGBs are sub 1%. Oh gee...
I'm gonna buy some US stocks, you know, maybe they're yielding the US equity market back then. Maybe I'll buy REITs that have a nice yield.
Exactly. Okay. The old carry trade. So I take my yen.
And I buy, I change it into dollars and I buy Avalon Bay.
Correct. I buy Avalon Bay. Correct. Example.
So, Mr. Eisman, isn't it true that you know something about carry trades? Yes, your honor. I... Okay. So they're involved in the C. So they're doing that for the yield pickup. And then lo and behold, guess what? Not only is there yield pickup, but it's yield pickup plus the dollar keeps going up.
So Avalon Bay, forget about what the price Avalon Bay did in dollar terms. The dollar, let's say the dollar goes up. Let's say Avalon Bay goes up 10%. And the dollar goes up 10%. 20%. You just made 20% by taking your yen and buying Avalon Bay. What's wrong with that?
Yeah. What could possibly go wrong?
Okay. All right. Okay, the yen, mind you, at one point going back a number of years ago, it was 80. It's now 160. All right. The reason the yen keeps weakening is because rates are not high enough in Japan. In Japan, they have... I urge everyone to follow Robin Brooks on X, former Goldman Sachs guy, related to Brookings, great guy, and he has a wonderful chart. You'll appreciate this. He graphs debt to GDP versus interest rates. And you might figure out the more debt the country is, the higher the rate should be, just as you would with a subprime buyer. All right? So you look at countries like Switzerland or Sweden, they have very low borrowing costs on one extreme. And then pretty far up the curve you got Europe in the middle and further up the curve you got the US and then you got Japan, right?
And if you look at the line, if you look at Japan's debt to GDP, their 10-year, you think it's high now. It just crossed 4% for the first time in 30 years. It really should be around 7%.
Okay. So let me ask, so our debt to GDP today is around 125-130%.
Correct. So if what you... if the relationship worked, our 10-year today is 4.8%. Japan should be seven.
They're saying seven. And by the way, a couple footnotes I need to add. It is true that unlike our country, much of the Japanese debt is owned by the Japanese themselves.
