Just when everyone began to relax into thinking the risk of tariffs negatively impacting the economy was over, President Trump brought it right back. It looks like President Trump is really serious about wanting Greenland. This is no longer about purely negotiating about tariffs, and this is not a positive for the markets or for the global economy. This story is far from over. Nvidia introduced its newest chip called Reuben. Nvidia started shipping the Blackwell chip only in late 2024 and it now is already starting to look obsolete. In my view, Bur's argument is strengthened by the introduction of the Reuben chip. Now, if we ever have a recession or some other negative news, those inflows into index funds will reverse and become outflows. I think that because of the dominance of index funds, any market correction will be quicker and more severe.
Hi, this is Steve Eisman and welcome to another edition of the weekly wrap. This is for the week ending January 23. However, because I had to go on a trip this Thursday, this wrap will be for information only through Wednesday. Anything important that happens on Thursday and Friday, I'll pick up next week. In this week's wrap, I have a new theme: lone wolves. I am starting to think strongly about so-called lone wolves and their impact on the market as their contrarian positions become more influential. President Trump is a perfect example. He was the consummate underestimated outsider who is now at the center of the world in terms of forcing his points of view.
The week of January 23rd began with trade tariff news. Just when everyone began to relax into thinking the risk of tariffs negatively impacting the economy was over, President Trump brought it right back. It looks like President Trump is really serious about wanting Greenland. And Trump wants what he wants. And as part of his plan to get it over the weekend, he imposed an escalation of additional tariffs on eight European countries as a means of putting pressure on Denmark. The tariffs start at 10% in February and then escalate to 25% in June. In response, Europe threatened to retaliate. Now, this conflict with Europe has potential for escalation. This is no longer about purely negotiating about tariffs. It's about strengthening US economics with unfettered access to rare earth metals. 85% of Greenlanders don't want to be part of the United States. And so this is now being framed as Trump versus Europe and about credibility and ego. And a battle like that is very, very difficult to handicap. And this is not a positive for the markets or for the global economy.
Now the market suffered a steep decline Tuesday and it was not a positive for bonds either as the 30-year Treasury yield jumped nine basis points Tuesday morning and the dollar declined as well. And then there was Wednesday, just one day later. On Wednesday, President Trump was at Davos pushing for Greenland, but stated that the US would not use force. However, almost simultaneously, European lawmakers suspended implementing the tariff trade agreement agreed to in July. And then later Wednesday, President Trump announced that a framework had been reached with NATO on a Greenland framework and therefore he would not impose the February tariffs on Europe that he announced over the weekend, but no details were provided. But the market rallied on these late afternoon headlines. This story is far from over, so stay tuned.
Now, before we get back to earnings, I want to flag several pieces of news that I think are important. We are starting to see a trend where alternative points of view are becoming somewhat mainstream. At the very least, these points of view are being integrated into the narratives. Monday's interview, our interview with Gary Marcus about large language models and their ultimate limitations is a perfect example. So, check it out. Michael Bur is another example of a lone wolf whose point of view is pushing against the mainstream narrative.
With respect to Michael Bur, I am flagging a piece of news that occurred a few weeks ago at the annual CES tech conference in Las Vegas. There Nvidia introduced its newest chip called Reuben. Jensen Wong, the CEO, pointed out that this new chip is much more powerful than Nvidia's Blackwell chip, and Reuben will start shipping later this year. All the tech commentators waxed poetic about Nvidia's latest innovations, but not one commentator focused on something that should be obvious. Late last year, Michael Bur of The Big Short fame pointed out that hyperscalers have lengthened their depreciation of semiconductors from an earlier 3 to 5 years to a current 5 to 6 years. And he pointed out that by lengthening depreciation schedules, hyperscalers have inflated past and future earnings by multi-billions. In my view, Bur's argument is strengthened by the introduction of the Reuben chip. Nvidia started shipping the Blackwell chip only in late 2024, and it now is already starting to look obsolete. If anything, hyperscalers should be reducing depreciation schedules, not lengthening them.
There is just one problem with Bur's argument. What catalyst will force hyperscalers to shorten their depreciation schedules and take the resulting large write-offs and reduction in future earnings? I'm sure the companies themselves are in no rush to do this and their auditors would have to force the issue, and given the history of the audit industry, that's not going to happen anytime soon. So Bur seems to be right, but at this point it's still an academic exercise.
There was also quite a bit of news on affordability. Again, President Trump spoke at Davos on Wednesday and he mentioned housing affordability, but unfortunately gave few details about housing-related proposals. I'm guessing more info will come out over the next few days. But in other affordability news, at the end of last week, President Trump and the governors of several northeastern states agreed to push for an emergency wholesale electricity auction that would compel technology companies to effectively fund new power plants. Tech giants would pay for power over the duration of 15-year contracts for new electricity generation capacity and would pay for that power whether they use the electricity or not. The issue here is that the enormous growth in AI data centers is driving up the cost of electricity for everyone. And this auction is designed so that the increase in electricity prices will be borne more by tech companies. It would also facilitate an increase in power plant construction. As a result, companies involved in such construction such as Quanta, GE Vernova and Eaton had a strong rally last Friday.
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Let's talk about private equity for a minute. Sometimes lone wolves join into packs and create their own society with their own rules. Private equity is a good example of this. Private equity has for years successfully isolated itself behind firewalls of secrecy to build outsized financial results for a few select investors. I mention this because I received a lot of questions about private equity and private credit. But private equity is going through many problems these days. There are fears about the future of private credit which we have discussed many times. But there are also issues about private equity monetization. Private equity bought many companies during and just after COVID when interest rates were zero. With rates now significantly higher, private equity is having problems selling their levered COVID-era purchases because, to be frank, current valuations are mostly below the prices they paid. And that's because of higher interest rates.
Because of this challenging monetization environment, there are apparently a record 31,000 unsold companies owned by private equity. Their investors are upset with the lack of monetization. So, private equity has had to get creative. Private equity has created what they call continuation vehicles. They raised 107 billion in such vehicles in 2025, up from 70 billion in 2024. Now, these vehicles amount to around 20% of all private equity sales, up from 12 to 13% in 2024. These continuation vehicles allow a private equity fund to sell assets from the private equity fund to the continuation vehicle, thereby generating a new fee cycle. Now, some observers are okay with these continuation vehicles because they argue that investors have the option of cashing out or continuing to invest. Although it is unclear how easily investors can cash out or by how much. One bothersome aspect of continuation vehicles is that private equity sets the price at which it sells into the continuation vehicle. This is not an arms-length transaction.
And now back to earnings season. First up is Netflix. Netflix numbers were good, but not good enough. Revenue and earnings per share beat, but only slightly. The stock was down over 4% after hours on Tuesday. Given the negativity around the stock, a small beat was just insufficient. But in some ways, the earnings results are irrelevant for now because all eyes are on whether Netflix will be able to acquire Warner Brothers. On Tuesday morning, Netflix changed its Warner Brothers offer to all cash. Same price of $27.50 a share, but now all cash. Personally, I think the risks here are huge. First, there is the issue of time. I'm betting that the Justice Department will challenge this deal on antitrust grounds, and that will delay the deal at the very least. Yet, even if that does not happen, I have my doubts about this deal. Warner Brothers' reputation is that it has a very, very difficult culture. The division heads are all out for themselves. They don't cooperate and they stab each other in the back. Yes, Warner Brothers gives Netflix a huge library and a great studio. I'm just not sure the aggravation is worth it. And the market seems to be having doubts as well, as the stock has declined from over $120 in late October to its current low in the low 80s. That's quite a correction.
Next up is D.R. Horton. The homebuilder company actually had decent results. It beat slightly on most metrics, earnings per share and revenue. However, it missed on the all-important orders metric. It reported 18,300 signed contracts versus expectations of 18,653. But in the end, none of these results mattered. Why? The tariff trade news caused the 10-year Treasury yield to jump to 4.3% on Tuesday. And that means that mortgage rates are back above 6%. And that just hurts homebuilders more than anything. And if rates stay this high, that's going to hurt whatever proposals President Trump makes at Davos with respect to housing affordability.
Regional banks, they reported this week. And just to review a bit from last week, the business models of regional banks are much simpler than the larger banks. The earnings of the two large investment banks, Goldman Sachs and Morgan Stanley, are driven by M&A and IPO volume, trading volume, and wealth management inflows. The regionals do not have an investment banking presence nor any real wealth management. Their earnings are almost solely dependent on lending. Thus, the earnings dynamics of regional banks are driven by one: is the net interest margin going up or down? Two: is there loan growth? And three: is credit quality getting better, worse, or remaining stable? The results of the regional banks were mostly fine. Net interest margins are improving because the yield curve is steepening. Also, more importantly, credit quality data reported by the regionals was quite benign, which bodes well for the overall economy. The credit data that the banks are reporting is giving no indication of any signs of a recession.
But because of the narrowness of the regional bank model, the range of valuation is lower than the large banks. Now the main driver of valuation is the return on tangible common equity. The higher that is, the higher the price of the stock relative to tangible book value. However, regional bank valuations tend to be lower than those of the large banks. With the exception of Citibank, which still has a sub-10% return on tangible common equity, valuation of the large banks ranges from a low of 1.8 times tangible book value for Bank of America to a high of 3.7 times for Morgan Stanley. But as seen on the table that we're going to put on the screen, even though some regional banks have very solid returns like a 19% return on tangible common equity for Fifth Third, the returns tend to be lower than the large banks and the valuation range is therefore lower and narrower as well, from 1.5 times for TCOP and Zions to 2.2 times for Fifth Third. Investors are just not willing to pay up for regional banks as they are for the mega and investment banks.
I'd also point out that generally the smaller a regional bank, the worse the returns tend to be as the costs of technology and regulation eat into return. That's why a bank like Bank of the Ozarks with a market cap of only 5.4 billion is valued at only one times tangible book value. The major investment theme for the regionals is a potential and necessary bank M&A wave. The Trump-appointed bank regulators are much more open to banks merging and I think such mergers are actually necessary because the cost of technology and regulations make it much more difficult for regional banks to compete with the large banks. Also, many small banks can't afford the cost of insurance against cyber attacks and therefore they have to self-insure. This is very costly. A merger wave would go a long way to remedying these problems. The risk to this thesis, and it's a big risk, is the egos of bank CEOs. One bank that investors hope will sell, for example, is First Horizon. But on its third-quarter earnings call, the CEO intimated that he was a buyer, not a seller. Back in October, when he said this, the stock did not react well to that information.
And now for the mail. This is a question from Jeff who says the following, quote: 'Hi Steve, you mentioned that if there is a pullback in the market then index investing is going to make it more severe. Could you elaborate on this?' Great question. First of all, let's just think about the implications that over 60% of equity market flows are into index funds and ETFs, most of which are passive funds. That means when index funds receive these flows, they just automatically buy the stocks in the index in the size that those stocks exist in the index. So since Nvidia is 7.4% of the S&P, the index fund will automatically allocate 7.4% of its flows to buying Nvidia. Now, if we ever have a recession or some other negative news, those inflows into index funds will reverse and become outflows and those same index funds will sell automatically. I think that because of the dominance of index funds, any market correction will be quicker and more severe. And we got a preview of that last year when the S&P declined 16% from late February till April 8th. NASDAQ was down even more. The market then rallied because investors realized that President Trump's tariffs weren't going to be that bad. But when we have an actual recession, the market correction should be even more severe.
One more aspect to the mailbag. We received scores of comments about the Gary Marcus interview that dropped Monday. Some viewers agreed with his arguments about the limitations of large language models. But there was also a lot of pushback with some viewers completely disagreeing and some arguing that even if he is right, the demand for chips from inference will keep chip demand high. There is so much to discuss here. So next month we will post an interview with a computer science professor to explore these issues even further. And that's the wrap.
As I said this last Monday, I posted an interview with Gary Marcus, retired professor at NYU of psychology and neuroscience. Gary is a leading critic of AI large language models. He argues that LLMs have reached diminishing returns in scaling and that this scaling is an intellectual dead end. Gary was a lone wolf in this position for a long time, but his views are now gaining a great deal of traction. I've been following Gary for quite a while. He's an important critic of the entire AI enterprise as it is currently conceived and you generally don't hear his point of view on business news. He has an important viewpoint that everyone should hear. If he is right, the torrid growth in AI that we have seen may slow and that would have broad implications for the overall market. So check it out.
This coming Monday, I will post an interview with Ken Sahowski, the payments analyst at Autonomous Research. We had a wide-ranging conversation from the continued dominance of Visa and Mastercard to the intense competition in the rest of the payment sector. Hope you tune in. If you haven't already, please consider subscribing to our YouTube channel so you can receive these weekly wraps along with our podcast and the financial literacy master classes. Subscribing is the best way to help the channel and we greatly appreciate your support. Also, be sure to check out our website, realeismanplaybook.com. There you can easily access all our episodes as well as the financial literacy master classes, our new blog, and some other goodies as well. Check it out and see you soon.
This podcast is for informational purposes only and does not constitute investment advice. The hosts and guests may hold positions in stocks discussed. Opinions expressed are their own and not recommendations. Please do your own due diligence and consult a licensed financial adviser before making any investment decisions.
