Today's number: 20. That's the percentage of British people who have come up with a business idea at the pub. True story. I've been reading a lot about the downsides of alcohol, Ed, and I finally decided to do something about it. I've decided to stop reading.
Here's a question. Have you ever come up with a business idea at the pub or at a bar? I feel like you probably have.
God, I've had so many bad business ideas.
Is that where you came up with Oddvok?
Oh, you know about Arvar. That's very impressive.
I tried to roast you there. I can't tell if it landed.
What did you say about coming up with a bad business idea at a bar?
Well, here's the thing. I'm getting — 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 fingers up your ass and tell you to cough, which is worth 120 grand a year right there.
Anyway, so I'm getting — and I know what they're going to say. They're going to come back and say, 'Oh, you know, on the whole you're pretty good. You need to drink less.' I'm like, 'Uh, 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 partying. By the way, speaking of big tits, I think height in men is the next — is the new big tits. What do you think?
Not as much. I think that online dating has distilled things down to some anodyne 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 8% of the population.
It'd be interesting to see if height augmentation becomes the new breast augmentation, if people keep on extending their shins and their limbs. Because I know a lot of men are putting some — what do you call them — in their shoes?
Lifts. That's right. Would you ever do that? Let's say — I mean, you're already a pretty tall guy, but let's say you were five six. Would you wear lifts or would you consider something like that?
Um, I don't — 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 off 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?
This is what you have to look forward to. I used to be six three and I'm shrinking.
You start shrinking as you get older. Your height shrinks, but your prostate gets much, much bigger.
And you also develop this incredible ability to grow hair from your nose and your ears.
That's to look forward to.
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.
I was looking at the calendar. I was like, 'Okay, 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 day is — are we on the main stage?
Main stage. March 14th, 10:00 a.m. Be there. It'll be square. It'll be very exciting.
Balance me out. You're taller than me. Um, okay.
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 Eisman, 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 Profy Markets.
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. 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 going to 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. 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 realize 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, as someone who has seen crashes, who has seen crisis, 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 and the Middle East is remade and things are much better. But we're not going to know that for weeks. And regardless, 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 obviously it's not going to be the Ayatollah Khamenei. 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 take three 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.
Part of what I would wrap your thesis in is that 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. That's not possible, at least not anytime within the next year. And the reason why that's not possible is just because 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 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, 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 stake 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 OpenAI 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, if there's going to 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. One of the differences 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 spent — I think it cost, when I was running my hedge fund back then, I think it cost us like $10,000 per year, which when you think about it for a database that was that important, it was not that expensive. You could literally look at every single securitization that was created in the United States and look at all of the credit data for every single securitization. And there were methods where you could see whether the newer securitizations were doing worse than the older securitizations, which is the way you wanted to look at it. And you could do some real credit analysis to figure out what was going on, which is what I and my partners did. 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 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 OpenAI just because it's so much fun to pick on OpenAI. Okay, so here's a company that just raised $100 billion at a valuation of, I think it was $850 billion or $700 billion. I mean, you know, when you start to get to these numbers, it starts to lose me. I'll call it $800 billion. So now you've raised $100 billion. You're losing money. You're going to continue to lose money. At some point you got to make money. Are you going to generate a sufficient level of returns to justify the valuation that you got on your last round? I would suspect probably not, but we won't know that for a year. So, you know, once that happens, 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 do you think that there's going to be further erosion of value among the BDC guys, the Blue Owls, the TPGs, the KKRs of the world?
Well, they would say that, you know, people are picking on their exposure to software. And what these companies basically did was private equity went out and bought companies, a lot of which was during COVID when rates were basically zero. About 20 to 25% of the companies that were bought were software-type companies, and they were levered up with private credit from funds mostly owned by different kinds of private equity companies or business development corporations. And the question is whether or not these are good credits or not. Now people are freaking out because they think that AI is destroying software. I actually don't see any signs of that in terms of the earnings. You know, I was sort of amused when ServiceNow reported about a month ago. So when ServiceNow reported, I tried to go through 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 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 I — and I think many of us — understand a lot less than the first two.
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.
Okay. Please, because everything I've said so far is bad enough.
Okay. But one of the parts that's worse — which again I don't know how to quantify — is that over the last, I don't know, 10, 12 years, many life insurance companies have been bought by private equity companies now. And then what they have done is they have improved the returns of those companies by having those companies invest in the paper that they themselves generate. Now, in their defense, the yields on that paper are higher. The risk isn't necessarily worse. Could be. We don't know. But the other thing that has happened is they run these companies much more aggressively than traditional life insurance companies will 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 reinsurer. 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. If you went to Blue Owl and you basically told this story, they would probably say something like, 'What are you complaining about? Nothing bad's happened.' Well, nothing bad's 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 part of the US economy, which is why it was as painful as it was.
So far, what we've seen is there is some concern over private credit. I've been reading about it. I've been hearing about it. I've watched the stocks of these companies like Blue Owl, which is kind of the poster child. I've watched it go down. And to me, I sort of look at that and think, well, I guess people kind of know what's going on. So if this means that Blue Owl goes out of business, then whatever. 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 were going to go — they were all going to go bankrupt. And when banks go bankrupt, people can't get their money. And when people can't get their money, it's a freak show. That's why the great financial crisis was so bad. In principle here, it won't get as bad because the banks aren't the lenders here. It's the Blue Owls of the world and the KKRs and the Apollo of the world. So mostly, the people who would be hurt here would be institutional investors.
The caveat that I just gave you is that some of this stuff is in life insurance companies where, you know, there are individual policyholders. The other caveat is that banks do make a lot of loans to private equity companies, so they help fund them as well. Now, how big that is is not exactly clear. It's not small, but I don't think the banks — look, the banks are the best capitalized they've been in our lifetimes. So even if something really bad happened to private equity, I think the banks would be fine. People might get nervous, but I think it'll be okay. I'm more worried about what's going on in life insurance than I am worried about anything going on in the banks.
We'll be right back after the break. And if you're enjoying the show so far, send it to a friend and please follow us if you haven't already.
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We're back with Prophecy Markets.
One of the most impressive things about what you and your colleagues did was you saw the risk that other people weren't seeing and you figured out the instrument to leverage that alpha, that dislocation. What's the trade here? If you think that private credit is riskier than people perceive,
You know, the problem is that you would try — in theory you would try and buy credit default swaps on various kinds of credits.
