So, if you own the S&P, you're not diversified. You're versified.
We've got Steve Eisman on the podcast, the legendary investor from The Big Short, and he doesn't hold back.
I own a lot of these companies. I own Nvidia, for example. I watch and I worry. That's like everybody else.
Do you still run a short book?
I think to short this stuff... What motivates people? Armies, no. Gold. No stories. You see it in the market all the time.
You mentioned the Canadian banks. There was a time that you were very vocally short.
You want to say it again?
Do you like being known as the Big Short guy?
As far as I can tell, it's going to be on my tombstone. So, I've learned to accept it.
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Hey everybody, welcome to a very special episode of In the Money with Amber Canoir. If you're watching us, you can see that we're not at our normal set. We are downtown Toronto right on Bay Street for the Pictton Mind Shift Investor Conference. Now, part of that means that we get to interview Steve Eisman. He is a legendary investor who made his name during the financial crisis. You might have seen the movie The Big Short. Well, he was played by Steve Carell and was one of the few individuals who really studied and made money from the subprime mortgage crisis. And since then, people have been going to him wondering what's the next crisis. So, we go in depth and talk about all the potential pain points in the market in this episode. I won't say more beyond that because I know you guys just want to get into it. But remember, we're nominated for Signal Awards, two categories. Please vote because I really, really want to win. The links, producer Jillian has put it in the show notes. Okay, without further ado, ladies and gentlemen, Steve Eisman.
And just a reminder, our charts are sponsored by Wells Simple Trade, the self-directed trading platform built for active traders in Canada. Wells Simple Trade lets DIY traders chart, execute, and manage positions in a single view, all on a powerful commission-free trading platform. Snap the QR code on any of our charts, or if you're listening, you can click the link in the show notes. Steve Eisman, thank you so much for joining me on the podcast.
I'm so excited to talk to you. I started my career in journalism during the financial crisis.
Yeah. So it was a real minting. It also means that things were bad for a little bit and then I've kind of only known good times since.
And I think that's true of a lot of investors. So I think voices like yours are really important and I'm excited to kind of get into all the risks that we see out there. But everybody refers to you as Steve Eisman, the Big Short guy. Do you like being known as the Big Short guy?
As far as I can tell, it's going to be on my tombstone. Once I learned to accept it.
Because I feel like people must always be coming to you and it's the same that's true of everybody who called it in 2008. It's like, okay, what's next, right? Do you feel like people always want to know what's the next crisis? And I listen to you, that's not necessarily...
You know, I'd say over the years, a lot of times when I go on media, the person who is interviewing me is literally begging me to produce the end of the world again. And I had a very funny line where I was on CNBC and Ray Dalio had just predicted the end of the world again.
And they asked me what I thought about it and I said, 'You know what the problem with all these people is? They all want to be me.' And I have news for all of them. The role of Steve Eisman is taken.
So you don't see doom out there.
You are critical though. So just at a high level, because we'll get into the granular stuff, would it be right to call you sort of cautiously long the market?
Yeah, I think that's fair. I think that's fair. I mean, as long as the AI narrative marches on, the market will be fine. The whole market is one trade right now. The only two sectors of the S&P that are not related to AI would be staples and healthcare. And that's 14% of the S&P. So the remaining 86% in one way or another is related to AI.
I mean, that brings up diversification issues. Like people think, going back to my earlier point about people of my generation thinking the S&P is a one-way trade, you just buy the index and you go to bed every single night, right? This is a message though that I think is starting to sink in, right? People need to understand the S&P is maybe not as diversified as it was 5, 10 years ago.
Not even close. So, a couple of statistics. Infoch is 40% of the S&P right now. No sector has ever even been close to this level. Then add on top of it companies that are not technically in infoch but you would think of as being techy, which would be, I'll just name a few: Google, Meta, Amazon, bookings. You add them all up, more than 50% of the S&P is tech-related, is tech. Then add on top of that the entire utility sector, which is around 4-ish% of the S&P, because the utility sector is spending 250 billion in capex for AI. Then add on top of that companies that are industrials that build AI, like Eaton Rockwell, or provide the power, like GE Vernova and Quanta. And I don't know where you are, but you're probably north of 60%. And so if you own the S&P, you're not diversified, you're versified, because you're an AI trade. Now, maybe that's a good thing. Maybe that'll be fine. But don't kid yourself into thinking like if the AI trade ends, you're safe, because you're not.
Do you have a call on whether... you use the word 'maybe' a lot. Maybe that's okay. Maybe the AI trade will work out. Do you have a call on whether it will work out?
I don't have a call right now. I think it's too... I mean, what I worry about is will a real price war break out in terms of the LLM models, which I'm kind of hearing is starting. Tokenization has ended, so that hurts revenue. And you know, at some point maybe OpenAI or Anthropic will be in trouble. And if that happens, then the whole chain unwinds.
Let's underline, because I've heard you talk about this, and just for people who are not as familiar and follow your work, you have been really focused on concentration risk and the fact that all roads in tech lead either to OpenAI or to Anthropic.
Correct. Well, let's stop at the top of the food chain and we'll work our way down. So, Nvidia, which clearly is the top of the food chain, and all due respect to Jensen Huang, he's done an incredible job. So, not taking nothing from him. You know, the most recent quarter, Nvidia's revenue was up like 110%. Incredible that the largest company on planet Earth had revenue up 110%. Unheard of. But buried in the 10-Q is an interesting sentence that says that 70% of Nvidia's accounts receivable, which is basically revenue, is from five accounts. That's incredible concentration.
Meaning like there are only five customers?
Five customers are buying 70% of the GPUs. That's huge. That's incredible concentration. Now, who the customers are, I'm not sure. Probably, I'm guessing they're the hyperscalers, but I may be wrong. But if they're not the hyperscalers, they're one removed from the hyperscalers. So now go down the food chain to the hyperscalers. If you look at Microsoft, Amazon, and Google, 70% of their AI revenue is from Anthropic and OpenAI.
70% of their AI cloud revenue is from Anthropic and OpenAI. If you do simple math, that's like 25% to 30% of total cloud revenue. Then if you go to Oracle, which is even more concentrated, over half of its backlog is just from OpenAI. That's one of the reasons why Oracle has been downgraded. It's levered itself. Oracle's credit rating right now is triple-B minus, which is one level above junk. So that's the hyperscalers. Now let's go down to Anthropic and OpenAI. The whole chain relies on them. Now, what could hurt them? Number one, token maxing has ended, which for your viewers who don't know what that is, that's basically you're a software engineer and your company tells you, 'Dude, you got to use AI 24/7, no matter hell with the costs.' That's over. Then they got the bill. So now they're all cost-conscious. And then the second thing is that the open-weight models are taking big market share. And finally, what's very clear to me at this point is there are no moats in this business. None. There's no loyalty to any model. You know, use one one day, use another one the next day. So, where this business is going, I don't know. But those are the risks.
So, I've heard you talk about this no-moat argument. And I think, you know, the risk that these things just become commoditized is totally huge. But then you have this geopolitical, national security layer. These are executives that basically have a key to the White House, and this is not just a matter of technology. This is a matter of US versus China.
And what about the very fact that the US government is so hell-bent on making sure that America wins the AI race? Like having the power of the US government, maybe it used to be behind the banks, you now have the power of the US government behind Anthropic, behind OpenAI.
I think that's more, at least at this point, surface. I don't think the government has actually done anything. And because it hasn't done anything, I think that's why Anthropic and OpenAI are predicting the end of the world. Terminator 1, Terminator 2, to get the government to regulate, so that they could push out the Chinese models. That's what I think that's all about. And we'll see. I mean, so far the administration has...
Yeah. The other issue that I think people are trying to figure out is maybe a lot simpler and just goes down to they're spending a lot. You know, a trillion dollars, and for every dollar you're spending, you have to look at how much revenue do they need to break even. Have you done that math on does all of the spending even make sense? You know, when you look at the dollars that need to come in, not just to break even, but to actually make money from these investments.
I haven't done the math. Some other people have.
There's a guy I watch on Substack who I interviewed, Ed Zitron, who's done quite a bit of math on it. I don't know if he's right. But the numbers are huge. I mean, the amount of revenue and earnings that these companies have to generate to justify all this capex is staggering, you know.
Like what? Like 10x, 20x?
Whether that happens or not, I don't know. Maybe it'll happen.
So how do we boil this down to... I know you don't manage money anymore, you manage your money. What does that exposure look like in the portfolio? Because you also don't want to miss out. You can't deny that AI is...
I own a lot of these companies. I own Nvidia, for example, and I watch and I worry. That's like everybody else.
But not ready to take off?
I'm not. I think to short this stuff, it's...
You lose a lot of money shorting this stuff.
Narrative is such a powerful thing. You know, there's a wonderful scene at the end of Game of Thrones where they're trying to figure out who's going to be king, and they bring in Tyrion Lannister, who they've put in jail, and they bring him out to tell them because he's a really smart guy. Maybe he'll tell them what to do. And he has this wonderful speech where he says something like, 'What motivates people?' He says, 'Armies, no. Gold, no. Stories.' Stories, nothing can stop it. And I always thought that was a very insightful thing because you see it in the market all the time.
Well, and stories are very important when you're trying to get people to open up their pocketbooks to fund your initiatives.
And so the narrative is important, but as you know, leverage is also important. And we're starting to see that other part of the story unfold. These companies going from capital-light to capital-intensive, hemorrhaging cash to now bleeding cash, and leverage going up. Is that scary yet or not yet?
Not quite. I think it's a big concern. But if the AI story succeeds, it'll be fine. So, we're back to Anthropic and OpenAI in a sense.
And again, I know I'm trying to pin you down. I'm like those journalists saying, 'Please feed me a crisis.' But do you have a probability, or you can't even...
I can't even handicap it. I'm just watching.
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What are you watching in the bond market? Because the hyperscalers are part of that story. The fact that rates are going up globally, but particularly in the US. And there too, people are trying to figure out, should I be scared of this or is this just normal because you've got good growth, you've got spending that's insensitive to rates, and maybe this is just the new neutral. Where do you... And then other...
I haven't seen spreads blow out. I just haven't. So until spreads start to blow out, the bond market's not concerned.
And spreads, just for people who aren't aware...
Everything is priced off of Treasuries.
So today, let's just use a simple example. The 10-year Treasury yield is 5.3%. So everything, if someone were to issue five-year paper, that would be priced off of 5.3%. So if you were rated triple-A and you're corporate, you know, maybe it's a 100 basis point spread. And if you're rated triple-B, maybe it's a 300 basis point spread. And those spreads go up and down. So if all of a sudden triple-B spreads, which were, let's just say, 200 basis points or 400 basis points, that means the bond market's worried. And so the fact that the yields have gone up and the S&P remains around a record high, that makes sense to you because it's not going up for a bad reason. It's going up potentially for a good reason. The growth is up.
What do you do with the fact that only a small part of the S&P is doing well? In fact, if you look below the surface, it seems like most of it's not doing well.
Most of it is not doing well.
Well, the only thing that's really doing well are these really big tech companies. Do you get into that trade or do you like to pick up some McDonald's, some dare?
I'm not interested in McDonald's. I haven't eaten a Big Mac in a long time.
Oh, I used to really like Big Macs. They're so tasty.
They're so tasty. You can get salads from there, too.
It's not what I'm going to McDonald's for. So, I mean, there's so many stocks that are just like household names that have been...
I mean, take for example like a Home Depot, which I don't own. I think it's down 18% this year because interest rates are higher and the housing market is more abundant. The market's pretty narrow.
What do you think Berkshire is doing with LAR? It's a housing play.
I mean, the stock's down a lot.
So, they have a very long... I shouldn't say I don't get it. I do get it. The stock's down a lot. There was a short report on the company. I haven't really read that short report, so I don't really know, but I think they're taking the view that, I mean, they already have housing. They bought two companies. You know, if they added a third, they'd be the biggest home builder in the country.
So, you think it's that long-term play? There's nothing about housing right now that makes you feel like it's washed out. You want to get excited about...
I mean, tell me what rates are going to do. Put it this way: the stocks are cheap. I own one.
I don't... The symbol is MTH. It's Merit. It's a small company. The stock I recommended in January. The stock is lower because of rates. It's probably selling at like 80% of tangible book value, which is really cheap. So if rates were to go down, I think that stock would just be like a coiled spring. But rates have to go down. If they don't go down, the stock's not going up.
