Great to be here. Who knew what I would say? One thing in Miami that I'm sitting here four days later, so it's always great to follow the king, Jamie Dimon.
Well, anything the king said that you thought was kind of interesting? Because he did talk about private credit, which is something that's definitely on your radar. He sounded much more positive than I thought he would.
Yes, he's optimistic. He's at the leveraged finance conference, so I think he probably needs to be. I think you focus on the right things. You can't predict when we're going to have a downturn, but what might cause it? I'm in the camp that actually the stock market has added such a wealth effect to the economy that it actually could be the stock market selling off that actually slows the economy. So they're all kind of intermixed here. And the stuff we can talk about what I said down there about private credit, I think it rhymes with previous cycles, but every cycle is different.
So let's go there and talk a little bit about how it rhymes with previous cycles. Where does it rhyme specifically so that concerns you?
So the whole thing about this cycle is that it's not systemic. You don't have the risk, the banks aren't there, so we don't have to worry about, you know, depositors being at risk. The similarities are that the banks are lending to the private equity and private capital firms, right? That's going on. They did the same thing to the mortgage companies in 2004 or five and six leading up to the crisis. What did they do? They provided warehouse lines to New Century or credit on lenders, Countrywide. So they went out, produced the mortgages. What did Wall Street do? They bought those mortgages, packaged them and sent them out in CDOs and everyone bought them. Great cycle, same cycle, the same institutions that are now buying, you know, all this credit. And so as soon as Wall Street sees credit turn a little bit, what they'll do is the credit lines that they're now providing into that sector, they'll tweak it a little bit, they'll pull some back. Then what happens? You get left. The reason these mortgage companies went out of business was because they couldn't sell it anymore and it got stuck on their balance sheet. Chair got pulled. So then the real marks start happening when liquidity starts to dry up and it exposes the leverage. So whenever liquidity dries up in any asset class, explosive leverage and no good asset goes on levered is basically how it goes.
So it's been an incredible journey to see that stocks haven't been toppled by anything that has happened this year. We have so much geopolitical risk. We have AI concerns, private credit. What is going to be the headwind that actually sends us into a correction or worse?
I think it's employment, unemployment. So earnings have been strong enough, I think, to clear the market. I think we've had a broadening out within the market which has been healthy in other sectors other than tech, which is great. But I think you're starting to see trends potentially in employment. Now, this memo that came out last week that you guys were talking about all week, this genie memo about what it could look like in 2028, the apocalypse, so to speak. There's some truth to it. And you have to imagine what can happen. So you get all the benefits of being efficient as a company and your margins improve. So you get that now. But we saw already from Block and what was said, you know, firing, you know, 40% of their staff. You know, one note literally took pages it felt like out of the memo and said this is what we think we can do now, be more efficient. So those are white collar jobs. And so that's in the economy.
Well, to be fair, I think we're all trying to figure out is that a Jack Dorsey figuring out the future of that company, right? In terms of management and whether or not that is an indicator of what's to come. And there are a lot of people who say that's, you know, not something that it's, you know, production for us that's sort of camouflage as. And I like this is bloating. We're going to be speaking about this a little later.
I mean, he's certainly overhired probably this pandemic. But what he said was irrefutable in terms of why he believes there'll be more efficiency in that, that he doesn't need humans to do all the jobs that they were doing.
I want to go back though to overleverage, because I always think about who's exposed ultimately, like what happens when the tide rolls out. And I'm just curious how you see potentially a crisis akin to the GFC happening because of private credit. So I think in terms of it fueling the economy and economic growth, companies being able to access credit is great for employment, it's great for companies, but maybe they otherwise wouldn't have gotten it. Or maybe the leverage is too high, or maybe the covenants are too light that allow these companies to keep borrowing, modifying loans as soon as the money stopped coming in or slowed down, I should say, on the institutional side, what did we see?
We saw private credit get offered on the retail channels. Well, some of these banks and brokers are incented to get it onto those channels. And that's my point. When retail investors get the opportunity all of a sudden to buy something, right? You know, listen, we talk about this a lot. Yeah. We just talk about making it topless. I mean, the idea that it's a signal of something that the market becomes more available or what he said is it becomes more democratized.
So in your view, not a good idea for the everyday investor to have access to these products?
If I were a retail investor right now looking to get myself exposure, I would be buying Blackstone, KKR and Apollo. I'd be buying the parent companies, that large PE firms that have permanent capital, that have, you know, a huge fee income stream. That's how I would expose myself. And guess what? I can buy it and sell it in the same day.
You wouldn't bother putting private credit.
I wouldn't be putting private credit funds in your 401k. If I had a retail broker that called me and offered me that, I don't think he'd be like, because buying those names are liquid, as you know, like we cover, right? These firms you can sell and buy easily, but come on in.
Alex, Governor, you're listening? Yeah. Yeah, we're talking about retail investors. And I actually wanted to ask you, Danny, one new segment of finance that they're actually foraying into is prediction markets with kind of the excess cash that they have to spend. What do you think that will look like later this year?
Prediction markets continue to grow. Well, they're regulated by the CFTC, they've taken an extreme amount of market share from the traditional online sportsbooks that we've seen. But it's really interesting because I actually use them as a way to follow the news. Not that you guys don't provide all the news that I need here, but you want to know what's going on in the election in Brazil and you know that you want to either buy or sell Brazilian equities as a result. Watch those. Watch what's happening there so you don't have to trade those markets, but you need to watch it. And it's really interesting. One pops up, you're like, I never even thought of that. You know, I mean, I've seen like Goldman Sachs, JPMorgan, a lot of big institutional firms citing prediction markets in their research notes really often now. Right. And they're partnering in the media. They want to get it out there more. I get it. And listen, it's growing. It's a sector. It's evolving. But, you know.
Sorry. Well, no, go ahead. Please. No, it's all about regulation, elections, right? Go ahead. No, it's where the regulator lies. It's not at the state level to the federal. So that use case, I think to a lot of people makes a lot of sense. But the question, and this is a real question that is available on some prediction markets, will Jesus return in 2020? Said yes or no, doesn't necessarily carry the same weight. I think with someone like you, that's a sign of something.
Yeah, well, you know, I think there's an entertainment value. But I want to say like, let me give an example of something that I just talked about on my show the other day, which is, will the US debt exceed $50 trillion by the end of 2028? Even the CBO, which is nonpartisan, has literally 44,000,000,000,040. I'm negative on US debt. That's a whole other topic we can go into some other time. But if it hits 50 trillion, to your point, I say you take no, you trade no on that. Because if it's yes, we have a lot bigger issues. What do we have? Another pandemic, another financial crisis. We bailed out private credit in the tune of 3 to 4 trillion. How did we get to 50 trillion? So when I see stuff like that and it's trading at $0.50, so it's trading at a 50% chance right now, I watch stuff like that to tell me if it starts to move, then I start to dig deeper. What am I missing?
You watch it. But you don't participate in it.
I trade on Kalshi. I mean, I trade these markets, you know. Will the S&P close below 7800? I trade. Yes, it will trade below 70. When at the end of the year, will gold outperform Bitcoin, right? Yes, I believe it will. And it's interesting to see how they trade. Will the Fed cut? You know, CME Fed fund futures will match up directly what you will see on Kalshi in terms of, but I don't want to set up an account and trade Fed fund futures, but I can just trade yes or no that 4% chance that they're going to cut in March. Maybe.
So if you, how much do you allocate to a platform like that?
Not a ton, but enough that it's entertaining.
Yeah. So I do my NFL there now, you know, I'm going to do my Masters there during the golf tournament, so use it all. But yeah, I want to ask you, you said bail out of private credit. Do you think we get to that?
Well, I would. You said it, you know, if we got to that. So let me ask you, if we got to, if we got to the point Jamie Dimon just mentioned that, you know, things are okay. My issue is that things are okay because the Fed keeps bailing us out. There's a moral hazard. Yes. I believe it's in the back of people's minds that actually believe, you know what, if private credit goes, the Fed is going to have no choice but to bail it out. And they're probably right. It will have an impact on everything. Impact on the banking system. Right. It won't bring it down. So I'm half kidding, but I'm not. So what did the 12th go again? A whole other segment. But post-financial crisis, the TARP. The TARP, the people, we ran out of acronyms. Right. So we're going to have, we're going to come up with another one. It could be a vehicle the government subsidizes for a period of time. What did they do during COVID? They bought AIG, but people forget pre-COVID, we were already going through an economic downturn and it kind of resurrected companies otherwise shouldn't have been saved.
So if President Trump brings in a new Fed chair who is more comfortable with cutting rates, does this just fuel the problem or make it even bigger because she'll maintain some form of independence? Do you think he will?
I hope he does. I don't know, because if he doesn't. Yes. Well, then you're starting to see what will creep in. Yields will start to move higher in the longer end, anticipating that whatever they do to move short term rates will fuel long term rates potentially higher. And you start to ignore inflation. You cannot ignore right now that inflation has stopped going down.
Yeah, and it's ticking back up. Is it, is it, is it just for a period of time?
We don't know yet. But with oil now moving higher, it seems. So it's something really to think about, the Fed's ability to cut rates from here.
So, Danny, Lisa asked Jamie Dimon this question. I thought it was a great one. Are you worried more about inflation or about an economic downturn? He kind of said both. Go to that.
I'm probably more, I'm not that concerned about inflation. I'm worried about the question you just asked. What if the Fed starts cutting in the face of inflation, what that would look like. I think the economy's fine, but I think that we've got to watch employment really carefully. And I think that's what everyone's spooked by. This memo that kind of came out that we're already seeing signs of that, white collar jobs getting lost.
