"Big Short" Inspiration Steve Eisman on 2008 vs. Today: Are We Heading for Another Financial Crisis?

Summary

Earn Your Leisure Podcast: "Big Short" Inspiration Steve Eisman on 2008 vs. Today: Are We Heading for Another Financial Crisis?

Release Date: April 28, 2025
Hosts: Rashad Bilal and Troy Millings

In this insightful episode of the Earn Your Leisure Podcast, hosts Rashad Bilal and Troy Millings engage in a compelling discussion with a seasoned Financial Analyst. The conversation delves deep into the potential parallels between the 2008 financial crisis and the current economic landscape, assessing whether we are on the brink of another significant financial downturn.

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1. Revisiting the 2008 Financial Crisis

The episode opens with a reference to "The Big Short," highlighting how past financial turmoil was forecasted. The host probes the analyst on whether similar indicators are present today.

Host (00:31): "Big Short, right, in 2008, you kind of forecasted that. Do you see parallels in today's economy?"

Financial Analyst (00:59):
"Do I see some parallels? Sure, I see some parallels. Am I as bearish as I was then? Not even close. I mean, not even the same universe."

The analyst emphasizes that while there are surface-level similarities, the structural safeguards implemented post-2008, particularly the Dodd-Frank Act, have significantly reduced systemic risks. He contrasts the leveraged environment of 2008 with today's more restrained financial institutions.

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2. The Impact of Regulatory Changes

A critical point of the discussion centers on how regulatory frameworks have evolved to prevent another financial catastrophe.

Financial Analyst (02:30):
"Post Dodd Frank. The leverage of large banks is literally less than half of what it was. It's probably almost two thirds less. That's enormous."

The analyst explains that major banks like Citigroup have drastically reduced their leverage ratios, making the financial system more resilient. This reduction in leverage is likened to moving from "Mercury to Pluto," illustrating the vast improvement in stability.

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3. Potential Risks: Global Trade Wars and Economic Recession

The conversation shifts to current geopolitical tensions, particularly global trade dynamics, and their potential to trigger economic downturns.

Host (04:23):
"Looking at the state of the economy now, right, we look at global trade... What do you think would have been the most effective way to get some trade solutions from country to country?"

Financial Analyst (04:50):
"I don't completely disagree with what President Trump has done in terms of imposing tariffs to get the ball rolling... What I don't like is the chaos... President Trump loves chaos, but everybody, most people in the world don't."

While acknowledging the necessity of adjusting global trade terms, the analyst criticizes the inconsistent and chaotic approach to tariffs. He warns that such unpredictability can introduce economic instability, although he reassures that it is unlikely to spiral into a crisis akin to 2008.

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4. Investment Strategies Amid Economic Uncertainty

Addressing audience concerns about investments in a potentially volatile market, the analyst shares his approach to navigating current financial uncertainties.

Host (05:39):
"If you were building your big, short portfolio today, what's the one trade that looks almost inevitable to you that will pan out over the next four or five years?"

Financial Analyst (05:48):
"I have no trade that I think would pan out immediately within the next year."

Looking ahead, the analyst remains optimistic about the technology sector, particularly artificial intelligence (AI).

Financial Analyst (05:55):
"I still think that most of the technology trades that people have... will be great because I think we are still in the very, very early innings of AI. Very early innings. We're like inning one."

He advocates for a long-term investment horizon, advising investors to maintain lower risk profiles and avoid attempting to time the market amidst ongoing trade negotiations and economic shifts.

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5. Personal Portfolio Management and Risk Assessment

The analyst provides a glimpse into his personal investment strategy, emphasizing risk management and portfolio trimming.

Host (07:05):
"How much risk are you keeping on the table?"

Financial Analyst (07:09):
"Own personal portfolio, I have about 15% cash right now. Which is a lot for me."

He underscores the importance of reassessing one's portfolio to eliminate "thesis creep" and reduce exposure to uncertain sectors. The goal is to preserve capital while remaining positioned for future growth once economic conditions stabilize.

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6. The U.S. Dollar and Reserve Currency Status

A significant portion of the discussion addresses concerns about the U.S. dollar's standing as the world's reserve currency, especially in light of its recent depreciation.

Host (08:24):
"The dollar is, I think it hit a three-year low. Is that something that's concerning to you?"

Financial Analyst (08:33):
"The doomsday scenario would be like the US deficit is too big... But I think what people miss... the financial system of planet Earth runs on Treasuries... As long as there's no alternative, it's not something I particularly worry about."

The analyst dismisses catastrophic predictions about the dollar losing its reserve status, highlighting the absence of viable alternatives. He points out the integral role of U.S. Treasuries in global financial transactions, reinforcing the dollar's enduring dominance.

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Conclusion: A Balanced Perspective

Throughout the episode, the Financial Analyst provides a balanced view, acknowledging potential risks without succumbing to alarmist narratives. His insights suggest that while vigilance is necessary, the foundational changes since 2008 have fortified the financial system against similar crises. Investors are encouraged to adopt prudent strategies, focusing on long-term growth sectors like technology and maintaining disciplined risk management.

Notable Quotes:

• Financial Analyst (00:59):
  "Do I see some parallels? Sure, I see some parallels. Am I as bearish as I was then? Not even close."

• Financial Analyst (02:30):
  "Post Dodd Frank... The leverage of large banks is literally less than half of what it was. It's probably almost two thirds less."

• Financial Analyst (05:55):
  "I still think that most of the technology trades... will be great because I think we are still in the very, very early innings of AI."

• Financial Analyst (08:33):
  "As long as there's no alternative, it's not something I particularly worry about."

This episode serves as a valuable resource for listeners seeking to understand the complexities of the current economic environment compared to past financial upheavals. With expert analysis and actionable advice, Earn Your Leisure continues to bridge the gap between finance and everyday understanding, empowering its audience to make informed decisions.

Transcript

[Narrator]

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[Interview Host]

Big Short, right, in 2008, you. You kind of forecasted that. Do you see parallels in today's economy? I know that that's something that a lot of people are nervous about as far as a recession is one thing, but perhaps even something bigger than that. That's what some people are actually, you know, predicting. Do you see parallels and, and are you bearish now, the same way you were bearish then?

[Financial Analyst]

Do I see some parallels? Sure, I see some parallels. Am I as bearish as I was then? Not even close. I mean, not even the same universe. So let me just elaborate a little bit about that. Do I think that there could be a global trade war? Sure, it's possible. It's also possible that there won't be a global trade war. Do I think that a trade war would cause a recession? Absolutely, I think a trade war would cause a recession. Do I think a recession that could happen because of the trade war would be a financial calamity on the same order as the great financial crisis of 2008? Not even close. Not even in the same universe. What happened in 2008? If you could boil down the financial crisis of 2008 into a paragraph, it would be great financial crisis happened for four reasons. Large financial institutions had way too much leverage. A big asset class, subprime mortgages, blew up. Those same large financial institutions owned a lot of subprime mortgages and derivatives, in particular, credit default swaps, which is a very technical financial instrument, tied the balance sheets of large financial institutions all over the globe into a spider web that was so complicated, nobody knew where it began and where it ended. That's the cause of it. The reason why that was such a calamity is, look, if General Motors, God forbid, went bankrupt, let's just say, and the government didn't bail it out and it was liquidated, that would obviously be terrible for General Motors. It would be terrible for all the employees who got laid off and all the companies that supply stuff to General Motors, maybe some of them would go bankrupt. They would certainly have problems. Maybe that would cause a recession in the United States. Possible, but that's all that would happen. But if you can't get your money out of the bank, if the large financial institutions go down, planet Earth burns. That's the end. So where are we today? Post Dodd Frank. The leverage of large banks is literally less than half of what it was. It's probably almost two thirds less. That's enormous. So, for example, Citigroup, which used to be levered officially 35 to 1. But if you added up all the stuff that didn't officially show up on its balance sheet, but they were responsible for it was 40 to 1. Today, it's 12 to 1. That's like the distance between Mercury and Pluto. To blow up a bank that's levered 40 to 1. If I could use an analogy. Takes a pebble. Develop a bank that delivered 12 to one takes a meteor. So do I think that whatever President Trump is doing could potentially cause a global recession? Sure, it's possible. Do I think that would cause a financial crisis that would cause the banks to go down? Not at all.

[Economic Commentator]

Looking at the state of the economy now, right, we look at global trade, did it need to be changed? Yes. Did it need to be blown up? I mean, there's, there's plenty of skeptics on that. I wonder, when, as you look at it, what do you think would have been the most effective way to get some tr. Some of these trade solutions from country to country or from a global standpoint.

[Financial Analyst]

This may be a little bit controversial. I, I don't completely disagree with what President Trump has done done in terms of imposing tariffs to get the ball rolling. Because I think if you went to any country and said, look, we don't like the terms of trade, let's talk, they'd laugh at you. They'd say, go away. So the only way you're going to get people to change the terms of trade is to put a bazooka to their heads. What I don't like is the chaos. We're in and we're out. We're out, then we're in. Here's our tariffs, and then there's our tariffs. We're taking it away, we're putting it back. That causes too much. That's, that's, that's not my, that's not my strategy. You know, by. President Trump, loves, loves chaos, but everybody, most people in the world don't. So that's where I would disagree.

[Economic Commentator]

If you were building your big, short portfolio today, what's the One trade that looks almost inevitable to you that will pan out over the next four or five years.

[Financial Analyst]

I have no trade that I think would pan out immediately within the next year.

[Economic Commentator]

Okay, what about four to five?

[Financial Analyst]

Four to five? I, I still think that most of the technology traits that people have, you know, whether it's in video or Microsoft, any of the well known will. Will be great because I think we are still in the very, very early innings of AI. Very early innings. We're like inning one.

[Narrator]

Yeah.

[Financial Analyst]

So, you know, between now and inning nine, it's going to be a bit of an adventure. But I think if you stick it out, you'll make a lot of money. What's going to happen within the next six months because of all the trade negotiations, I wouldn't have a clue. And I just would say you need to keep your risk lower. I would not try and be a hero right now. I don't think, you know, some people would argue that, you know, the markets come down a lot, so valuations are better and well, of course the market's lower, the valuations look better. That's the tautology. The problem is that if you go into a global recession, all the earnings estimates are going to come lower. So then it doesn't look so cheap. On the other hand, if most of the countries settle with, with the United States and then everything is fine, it'll have been a great time to buy. But I can't handicap that.

[Economic Commentator]

How much risk are you keeping on the table? If I may follow up, in my.

[Financial Analyst]

Own personal portfolio, I have about 15% cash right now.

[Economic Commentator]

Okay.

[Financial Analyst]

Which is a lot for me.

[Interview Host]

Are you.

[Financial Analyst]

I'm very long term. What I have done is I've gone through my personal portfolio and any stocks where I said, do I really love this? Why do I really own this?

[Economic Commentator]

Let's trim a little.

[Financial Analyst]

Is there any thesis creep, get rid of it. So that was the first thing I did. Then I took a lot of things just lower. But like I said, on long term, the problem with like let's say liquidating your portfolio if you wanted to go to an extreme is you got to pay over 35% capital gains taxes. So do I think the market's going to go down 35%? I mean, it could. I mean, if we have a global recession, it's not impossible, but it's a lot. So I'd rather just trim some risk and just sit on the sidelines and sit and wait till it's. And look, if things get better, if you miss the first 5%, move so what, you know, if things, if all the trade stuff gets settled one way or another, you know, it'll be a bull market again for years. So who cares if you miss the first week?

[Interview Host]

Yeah, the dollar is, I think it hit a three year low. Is that something that's concerning to you?

[Financial Analyst]

You know, let's, let's do the doomsday scenario that some people like to paint. So the doomsday scenario would be like the US deficit is too big. People are not going to see U.S. bonds as the safety vehicles that they once were. So they're going to sell the US Bonds and that of course causes the dollar to go down and something else will replace the dollar as a reserve currency and there goes the United States is a great empire and it's Armageddon and cats and dogs are lying together and whatever else happens in Armageddon, depending upon your religion. But I think what people don't. And by the way, that thesis has only been around for 40 years. So I remember in the 90s Pete Peterson, who had been one of the founders, I think of KKR was talking about how the deficit's way too big and it's a disaster and God help us, et cetera. And that was in the 90s and here we are 2025. We're all still pretty healthy. What I think people miss and by the way, I can't talk. What happens short term to the dollar? What happens short term to people? Trading in bonds is not something that particularly interests me. So the fact that the dollar has sold off has I think got a lot more to do with hedge funds repositioning, de risking, looking for safe havens. But long term, what I think most people don't recognize is that the financial system of planet Earth runs on Treasuries. Banks, for example, lend to one another overnight in what's called the repo market. And the repo market is only trillions and it's all at overnight Treasuries. To make an argument that the dollar is going to lose its reserve status, I think you have to make an argument that there's going to be some sort of substitute for Treasuries, especially short term Treasuries. And right now there's no substitute for short term Treasuries. I mean banks are not going to park their money in Chinese bonds. There's no euro bond of any real significance. There's no alternative. So as long as there's no alternative, it's not something I particularly worry about all that much. Even though people like to talk about it on CNBC and paint doom and gloom. Listen, I predicted doom and gloom once. Once was enough. I'm not interested in predicting doom and gloom again unless I really, really seriously thought it was possible.

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[Narrator]

Cards, the most secure and hassle free way to pay. But D.C. politicians want to change that with the Durbin Marshall credit card bill. This bill lets corporate megastores pick how your credit card is processed, allowing them to use untested payment networks that jeopardize your data, security and rewards. Corporate megastores will make more money and you pay the price. Tell Congress to guard your card because Americans lose when politicians choose. Learn [e-mail].