From the Big Short to Tariffs: Steve Eisman on Trade Wars and Globalization

Summary

Episode Summary: "From the Big Short to Tariffs: Steve Eisman on Trade Wars and Globalization"

In this compelling episode of "Escaping the Drift," host John Gafford engages in an insightful conversation with Steve Eisman, a renowned Wall Street investor famously portrayed by Steve Carell in the movie "The Big Short." Eisman delves into the complexities of current trade wars, globalization, and their profound impacts on the U.S. economy and global markets. The discussion also touches upon Eisman's experiences during the 2008 financial crisis, the real estate market's dynamics, and the evolving role of AI in financial analysis.

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1. Understanding the Current Trade Landscape

Trade Deficits and Tariffs

Steve Eisman opens the discussion by highlighting the United States' relatively low percentage of GDP derived from exports—11%—compared to China’s 20% officially (potentially 30% when accounting for indirect exports). He underscores the significance of tariffs and trade barriers, emphasizing that the U.S. has maintained lower tariffs compared to other major economies.

Steve Eisman [02:28]: “The United states only has 11% of its GDP coming from exports. That is the lowest number probably on planet Earth.”

Repercussions of Trade Policies

Eisman attributes recent trade policies, particularly those initiated during President Trump's administration, to an attempt to rectify the offshoring of manufacturing jobs. He acknowledges the complexities introduced by these tariffs but praises Trump's commitment to fulfilling campaign promises, noting the challenges in altering the established economic playbook.

Steve Eisman [07:22]: “He's trying to level the trading playing field because we are the only ones who seem to play fair.”

2. The Feasibility of Reshoring Manufacturing

Challenges in Rebuilding Domestic Manufacturing

John Gafford probes the practicality of bringing mass manufacturing back to the U.S., considering the historical factors like high labor costs and strong union presence. Eisman responds optimistically but realistically, suggesting that while feasible, it requires time and strategic incentives, such as tax write-offs for building factories domestically.

Steve Eisman [13:31]: “That's a great question. I think it's feasible. It's going to take time.”

Union Influence and Corporate Decisions

Eisman believes that corporations are likely to favor states with weaker unions to mitigate labor costs, predicting significant benefits for southern and midwestern states outside traditional union strongholds.

Steve Eisman [14:22]: “I think companies will probably choose states that don't have strong unions is my guess.”

3. Impact on Major Corporations and Supply Chains

Price Increases Due to Tariffs

John raises concerns about companies like Apple and Nike already raising prices in response to tariffs. Eisman acknowledges these moves as necessary adjustments for companies facing punitive tariffs, though he expresses uncertainty about the speed and extent of these changes.

Steve Eisman [12:28]: “Oh, I think they're probably increasing their prices because they have to because these tariffs are very punitive for them.”

4. Reflections on the 2008 Financial Crisis and "The Big Short"

Real-Life Inspirations Behind the Movie

Eisman recounts his experiences during the subprime mortgage crisis, which inspired the movie "The Big Short." He shares anecdotes about his early recognition of the impending financial collapse and his interactions with key figures portrayed in the film.

Steve Eisman [27:43]: “So I thought that was pretty cool information that I got this weekend, but I don't know how it's going to play out.”

Lessons Learned and Market Interpretations

Eisman emphasizes that while information is readily available, the critical factor is the interpretation of that data. He contrasts his approach with that of other analysts, highlighting the importance of deeper analytical dives over mere access to information.

Steve Eisman [39:02]: “I think that's what we paid, whatever it was. But you know what? The entire fixed income world had that information.”

5. Real Estate Market Insights

Current State and Future Predictions

Transitioning to the real estate market, Eisman discusses the challenges posed by rising mortgage rates, which have significantly increased from historic lows. He suggests that mortgage rates would need to drop below 5.5% to unlock pent-up demand in the residential sector.

Steve Eisman [21:43]: “My magic number for that is 5.5. I think when it hits 5.5, there is an onslaught of pent up demand.”

Market Stability and Investor Behavior

Eisman advises caution to investors amidst market volatility, recommending a de-risking strategy by selling less confident positions and waiting for greater market clarity before making new investments.

Steve Eisman [17:59]: “I sold a few things that I didn't have great confidence in and I'm sitting on my hands.”

6. The Role of AI in Financial Analysis

Enhancing Research Capabilities

Eisman acknowledges the benefits of AI in facilitating research and information access but asserts that the true value lies in the interpretation of data rather than the quantity of information available.

Steve Eisman [37:43]: “I think I'm going to say something a little radical: information is overrated.”

Impact on Investment Decisions

He maintains that while AI can aid in data retrieval, the nuanced understanding and strategic interpretation required for successful investing remain human-centric skills.

Steve Eisman [39:04]: “The most important information out there was the securitization data that came out every single month.”

7. Final Thoughts and Future Outlook

Potential Outcomes of Trade Policies

Eisman outlines possible scenarios stemming from current trade tensions, ranging from quick resolutions within a few months to the escalation into full-blown trade wars, which could have severe market repercussions.

Steve Eisman [15:19]: “The best case scenario I think is two to three months.”

Investor Advice Amid Uncertainty

He urges investors to remain patient and avoid reactionary decisions, emphasizing the unpredictable nature of markets influenced heavily by political variables.

Steve Eisman [17:59]: “This is not the time to be a hero.”

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Conclusion

This episode offers a deep dive into the intricacies of globalization, trade wars, and their broader economic implications, guided by Steve Eisman's expert analysis. Eisman's candid reflections on past financial crises and his strategic approach to current market challenges provide listeners with valuable insights into navigating complex economic landscapes. Whether you're an investor, entrepreneur, or simply interested in understanding the forces shaping today's economy, this episode serves as an essential guide to escaping the drift towards mediocrity and achieving remarkable success.

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Notable Quotes:

• Steve Eisman [02:28]: “The United states only has 11% of its GDP coming from exports. That is the lowest number probably on planet Earth.”

• Steve Eisman [07:22]: “He's trying to level the trading playing field because we are the only ones who seem to play fair.”

• Steve Eisman [13:31]: “I think it's feasible. It's going to take time.”

• Steve Eisman [14:22]: “I think companies will probably choose states that don't have strong unions is my guess.”

• Steve Eisman [21:43]: “My magic number for that is 5.5. I think when it hits 5.5, there is an onslaught of pent up demand.”

• Steve Eisman [37:43]: “I think I'm going to say something a little radical: information is overrated.”

Transcript

[John Gafford]

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[Steve Eisman]

The United states only has 11% of its GDP coming from exports. That is the lowest number probably on planet Earth. China officially is at 20%, but that doesn't include all the stuff that they ship to Vietnam and Cambodia that eventually makes its way here. So China, and this is just a guess, is probably at least 30%. Europe. Every country in Europe is in excess of 30%, with the exception of Germany, which is over 40.

[John Gafford]

And now, escaping the Drift, the show designed to get you from where you are to where you want to be. I'm John Gafford, and I have a knack for getting extraordinary achievers to drop their secrets to help you on a path to greatness. So stop drifting along, escape the Drift, and it's time to start right now. Back again, back again for another episode of. Like it says in the opening man, the show that gets you from where you are to where you want to be. And today we got something special. Something special for you guys because obviously there's a lot going on in the world today. And we wanted to kind of. I'm sick of scrolling through social media and seeing all of these pocket economists that, you know, class of Wednesday that know exactly what's going on in the world because they happen to vote one way or another. And I decided to maybe bring you some good information today. So what I did was I went out and we scored a Wall street legend. I mean, this is a guy who saw it coming when nobody else did. You may know him as the real life inspiration for Steve Carell's character in the Big Short. And he famously bet against Wall street in the 2008 housing crash and one massive. But he's more than that. He's a brutally honest guy. In finance, it calls it like he is, whether it's good or bad. And today we're going to talk about the good and bad of terrorists. Ladies and gentlemen, welcome to the show. This is Steve Eisman. Steve, how are you?

[Steve Eisman]

Pretty good. A little poorer, but a little poorer today.

[John Gafford]

Well, thanks so much for taking time out of your day. And I'm sure you've been busy commenting on all that's happening in the world today. And I do want to talk later a little bit about your experience with the Big Short. But obviously let's talk about the news of the day starting out. So let's jump right into it. What is your perspective on what's going on and where we're going to land?

[Steve Eisman]

I think, to use a term that probably no one has applied to this, what we have is a theological problem. And what I mean by that is everybody like you, like me in the markets, went to college, and we all at least took Econ 101. And at Econ 101, they taught you that free trade is good, tariffs are bad, trade wars are terrible. Thing about economics is it's very persuasive because there's a lot of math, there are a lot of graphs, there are a lot of tables and all that math, tables and graphs can't be wrong because they have all that math, graphs and tables, everybody walks out of. When you walked out of Econ 101, you thought, I really learned something. So we have been living in a world of economics now for a long time. And if you. And I think part of the problem is you have to go back to the 90s. In the 90s, President Clinton sold. He sold NAFTA and China, entering the WTO with two arguments. And those arguments were, this will increase GDP and it will create a lot of jobs. And he was 100% right about the former, and he was terribly wrong about the latter. After the movie, I got a great speaking gig, and I've made speeches all over this country. And let's say I go to university in the middle of Indiana or something. You drive from the airport through towns that have been obliterated, literally obliterated. I mean, half of Main street is closed. No new home has been built in a generation. And you have to remember that GDP is just an aggregate number, but it doesn't tell you that maybe half the country has suffered terribly from what happened. So I think what President Trump is trying to do, and I have to say great sympathy for this, is he's trying to right a wrong. Because after the 90s, we allowed our manufacturing base to go overseas, okay? But we didn't retrain our people. We left them. We said, it's your problem. You go deal.

[John Gafford]

Go learn to code. Go learn to code. I think was the.

[Steve Eisman]

Go learn to code. At Learn to code.

[John Gafford]

Yeah, there you go.

[Steve Eisman]

So I think what he's trying to do is two things. He's trying to level the trading playing field because we are the only ones who seem to play fair. We've had very low tariffs, very low barriers. Everybody else has tariffs and barriers. And he's also trying to bring a lot of jobs back to the United States. And you could think about President Trump whatever you want. Some people like him, some people hate him. But one thing that I find admirable, regardless of whether you agree with his policies or not, is he's one of the few politicians in our lifetimes who actually does what he says he's going to do. And nobody believed this tariff stuff because it's so against what everybody learned in college. They didn't take it seriously. He's just fulfilling his campaign promise. Now, the people who voted for President Trump, his biggest followers, are not big investors in the market. They're the ones who live in these towns. So I think there's a reset about what's happening, and it's extremely jarring because he's not playing by the playbook that everybody learned in college. That's part of it. What I think is also clear is that this is gonna take time. And thankfully, and I really mean this, thankfully, the United States is in the best position in the world to deal with this.

[John Gafford]

Well, I know that a lot of naysayers say, well, why did you know, why wouldn't he not negotiate before?

[Steve Eisman]

Oh, that's ridiculous.

[John Gafford]

Well, I think the best quote I saw was a Kissinger quote who said, you negotiate once the tanks are rolling because.

[Steve Eisman]

Exactly. The tires are the tanks.

[John Gafford]

Yeah, you have to show tanks. You have to show power prior to anything happening. So you knew he was going to flex a little bit and get this done. Now, I think that of a lot of the people that are making the most noise, who is the most susceptible to fall first in this show of power for the United States? Which countries do you think get in line the fastest?

[Steve Eisman]

Ah, okay, so let's. Let me quote some statistics. Okay, perfect. The Internet is a great thing for researchers. We know.

[John Gafford]

Depends on who's talking.

[Steve Eisman]

10 seconds. Okay, so the United States only has 11% of its GDP coming from exports. That is the lowest number probably on planet Earth. China officially is at 20%, but that doesn't include all this stuff that they ship to Vietnam and Cambodia that eventually makes its way here. So China, and this is just a guess, is probably at least 30% Europe. Every country in Europe is in excess of 30%, with the exception of Germany, which is over 40. Mexico and Canada are. Each 35% of their GDP comes from exports. And here's the kicker, 25 points of that, 35% comes here, exports to the United States. So if we are working under the assumption, and believe me, it's a big assumption, that everyone is going to act rationally. Everybody would come to the United States, cap in hand, and say, okay, listen, all the, all the stuff that we've been doing, jiggering the trade in our favor, games up, let's try and negotiate as good a deal as we can. That Says everybody's rational now. Everybody's not necessarily rational. You know, politicians want to get reelected. They might be a poster that they might be afraid that if they, if they cut any deal with President Trump, they're not going to get reelected. So I can't handicap that. I can only say that if they're rational, deals will be worked out. I do know because I have a very good friend who runs a hotel in D.C. that the hotels apparently in D.C. are filled with ambassadors from all over the world. Let's talk to negotiate. So I thought that was pretty nice information that I got this weekend, but I don't know how it's going to play out. My guess is most countries will cut a deal. It may take a few months to cut those deals, but most countries will cut those deals. China may not cut a deal. China may say, you know, this is just a form of war and we'll deal. That I can't handicap at all.

[John Gafford]

Yeah, well, it's, it's, I think it's. Of all of them out there, the Chinese are probably the hardest to predict what they will do of everybody, I would say completely. I think Mexico and Canada have to have just resolved this as quickly as possible because they're going to feel it quickly and miserable.

[Steve Eisman]

Like I said, 25% of your GDP is exports to the United States. You're not exactly holding a lot of cards.

[John Gafford]

You can't swallow that. Now, my next question is today, I guess it was Apple and Nike announced they're already starting to increase prices based on the tariffs. So is there any way their supply chains are already being interrupted based on inventory on hands to do this? Or do you see these major corporations never, never wasting a good crisis to try and increase profits? What do you see happening there?

[Steve Eisman]

Oh, I think they're probably increasing their prices because they have to because these tariffs are very punitive for them.

[John Gafford]

I don't actually think it's happened this quick, though. Do you think it's happened this quick?

[Steve Eisman]

That I don't know. I can't answer that question. I don't have enough information to know that one way or the other. I think Nike and Apple are going to have. Look, you can't rejigger your supply chain from Vietnam and China to the United States overnight. It doesn't work that way. You know, factories unfortunately can't be built overnight. That, that's just not how it happens. So does that mean that there are going to be higher prices for certain goods in the near term? Probably. You know, this is not going to Be a seamless transition.

[John Gafford]

Well, let me ask you this. One of the seemingly like you said, the towns that were decimated by nafta, by the auto industry moving to Mexico, all of these things happening. How, how feasible do you see? How feasible do you think it is for the United States to really move mass manufacturing back to the states? How feasible is that?

[Steve Eisman]

That's a great question. I think it's feasible. It's going to take time. I think one of the things that will, I'm guessing will help is, you know, right now in Congress, they're, they're horn swaddling on about taxes. And I think one of the things that will be proposed is if you build a factory in the United States. And I think it'll be backdated to the beginning of the year. So if you build a factory in the United states, you get 100% write off.

[John Gafford]

I think they're going to.

[Steve Eisman]

That's pretty wild.

[John Gafford]

Yeah, it is, it is. But don't you think that some of the reason that manufacturing left in the first place was organized labor in this country just put such a chokehold on manufacturing with making the cost of labor so expensive, did it force this or was it really just about corporate bottom line?

[Steve Eisman]

Some combination of both. You know, but unions are much weaker at this point.

[John Gafford]

Do you think they're going to have to make concessions to get, to get manufacturing back?

[Steve Eisman]

I think companies will probably choose states that don't have strong unions is my guess. So if I had to take a guess, you know, which states do I think are going to benefit the most? You'll see them in the south and the Midwest outside of union strongholds. That's just a guess.

[John Gafford]

I know, it's just, it's so funny to think that all of this kind of comes down to a handful of people acting rationally as they should. There's just no.

[Steve Eisman]

I mean, that's part of the problem with economics is, is when you peel it back, you realize that one of the major assumptions about economics is that people act rationally. And one thing I know from watching my screens every single day on terms of stocks is the last thing people do on most days is act rationally. They act emotionally.

[John Gafford]

What do you think the best case scenario is? For timeline for this to somewhat get resolved. And the worst case scenario is. What would you say?

[Steve Eisman]

The best case scenario I think is two to three months. Two to three months. That's pretty quick when you think about that.

[John Gafford]

Is quick. Yeah, that's fast.

[Steve Eisman]

And the worst case scenario is a full blown Trade war.

[John Gafford]

How far? So if it goes two to three months, do you think your average American is going to experience pain? Will we have time to experience pain there?

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[John Gafford]

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[Steve Eisman]

I don't know. That's above my pay grade. Man.

[John Gafford]

In the room. And I'm way above my, you know, your defense. That's how you maintain the reputation as one of the smartest guys in the room is you don't talk about things. You don't necessarily.

[Steve Eisman]

I actually was. I don't know. I really don't know.

[John Gafford]

I don't know. All right, well, as a sharp investor, right, as someone that invests, obviously you're a Wall street legend. As somebody that is a sharp Investor, how are you looking to take this situation and make it a positive for investors?

[Steve Eisman]

So what I would say to people right now is this is not the time to be a hero. You know, first of all, any, the, any analysis, you know, on my own podcast, the Eisen Playbook, I had my old partners on last week, which we just posted and we were talking about, you know, if we were all still together running our hedge fund, what would we do? And I think we all concluded that we would not press shorts. We would just take the book down on both sides. We would just de risk and we would sit and wait. And the reason is that when in normal times there are a lot of different variables that move markets and move stocks and right now that whole world is out the window. There's one variable that matters and his name is President Donald Trump. That means volatility. So what, what I would say to people is if you feel, if you, if, if you're literally having a conniption fit every single day and you can't sleep and Lord knows you need to sleep, sell some things in your portfolio, you know, sell positions that are not your favorite positions, you know, maybe even on your, some of your favorite positions. Sell a little, you'll feel better.

[John Gafford]

Yeah.

[Steve Eisman]

And wait, just wait. You don't have to be there for the first uptick if things get resolved. Because if things get resolved, it'll be uptick for a very long time. The downside risk here, I think the risk of a trade war is less than 50%. How much less than 50%? I don't know yet. But that's not infinitesimal. So if there's a full blown trade war, the market would go considerably lower. I can't handicap for you right now.

[John Gafford]

If everybody settles except for China, would we still consider that a trade war?

[Steve Eisman]

No, I would not consider that a trade war.

[John Gafford]

You can clear that China becomes an outlier to the problem.

[Steve Eisman]

The outlier to the problem. I think that's dealable, that that can be dealt with.

[John Gafford]

Okay, all right. Fair. Because I, I think it seems like everybody puts so much emphasis on China's reaction to what happens here.

[Steve Eisman]

Well, they certainly did that on Friday.

[John Gafford]

Yeah, yeah, they did. But down 10% was their market, which.

[Steve Eisman]

Was sort of weird, you know, I mean, what did you expect? Did you actually seriously think that China was not going to retaliate at all of going to tell. They had to. Yeah, they had to save face.

[John Gafford]

Well, let's get back to the retail investors here because obviously when, traditionally speaking, when, when the market falls like this, the money runs to bonds which then drop the yields on bonds. And for what I do, obviously real estate, we're so intimately tied to that 10 year treasury bond which fell under 4% but then bounced yesterday back over 4%, which I thought was really strange. What's your thought there?

[Steve Eisman]

I actually didn't understand that move other than people were trying to buy stocks and so they were selling bonds. Otherwise it made no sense to me. I would suspect if things stay hairy for a while, yields will go back down.

[John Gafford]

Okay. Because obviously for what we want to do, and this is where your kind of crossover of knowledge becomes so interesting to me, how do you think this affects the real estate market? Where are we going from here?

[Steve Eisman]

Well, if we're talking about residential real estate.

[John Gafford]

Yes.

[Steve Eisman]

You know, as we all know, the residential real estate market is locked right now and it's locked because of COVID And the reason why it's locked because of COVID is that everybody with a pulse refinanced their mortgage 3%. And today if you take out a mortgage, I mean, what's the latest rate? 6.6.5%?

[John Gafford]

No. Well, that's the thing with the bond yield going down on Friday, we got to six and a half, but as soon as it came back, we bounced back up to 6.75.

[Steve Eisman]

Okay, so call it 6.75. So one thing I learned very early in school is that 6.75 is more than 3.

[John Gafford]

3.

[Steve Eisman]

In fact, it's more than twice as much. And mathematically that's a problem. My guess is rates would have to go. Mortgage rates would have to go below six.

[John Gafford]

Yeah.

[Steve Eisman]

To get the more to get the residential market. Unlock, unlock it.

[John Gafford]

My magic number for that is 5 5. I think when it hits 5 5, there is an onslaught of pent up demand for people that needed to do something that wouldn't. You know, they're not going to swallow seven from three, but you'll swallow five five. Especially if the pain in your current living situation is great enough, you'll swallow that and make them.

[Steve Eisman]

I mean, if your kids are climbing the walls and they got no place to sleep.

[John Gafford]

Not to 5 5. So with this going on, if you had to look back at the housing market now, is this a bet you would make for it or against it going into the spring, which is traditionally our busiest time.

[Steve Eisman]

I think there's just so many variables, I wouldn't be making any bets right at this point. It's just too hard, too many variables to make. It's all down to one variable. It's one variable. It's all one variable. Markets are very, very difficult. You know, if you go back to 08, the variable was the balance sheets of the large banks. And what. And everybody was trying to do detective work on what they had. It turned out they had a lot of bad stuff. And that was a bad variable. Today the variable is the President of the United States, and I'm not. And he hasn't called me, so I can't give you any insights.

[John Gafford]

Yeah, he fired me on television once, but he hasn't called me recently either. So there you go. You know, I get kind of what he's trying to do, and I understand that could go very quickly. So how long do you think if there's no. You think if, if there can't be movement here? Let's say it's a stalemate and we really start to sting here. Do you think knowing what you know about him and seeing what you've seen, that he starts to back off this?

[Steve Eisman]

No way.

[John Gafford]

He's all in on this.

[Steve Eisman]

This is his bet, his presidency on this. This is it. This is it.

[John Gafford]

This is it.

[Steve Eisman]

You can't, you can't put all your chips into the poker table and then say, sorry, I take them back. Then you look like a fool.

[John Gafford]

Is there one of the players that's out there that we're currently negotiating with, you think if they fall, all of them fall? Because, like the eu, I think, pretty strongly came to the table this week, if I'm not mistaken.

[Steve Eisman]

Yeah, but it's going to take time. I really do think they're all going to come to the table. I think they don't have a choice. Do you think this is the most important. Our consumer is by far the most important entity in terms of economics in the world. You have to be here. You can't be Mercedes Benz and not sell cars in the United States of America. The company doesn't function. So, like I said, I feel pretty good that people will be rational enough that they'll try and work out as good a deal as they can. That's going to take time. This is complicated. I mean, you're talking about tariff, VAT and any other kind of regulatory restriction stuff that I don't really even know enough about. I just know it exists.

[John Gafford]

Yeah, well, they, I mean, they flat prohibit, you know, Ford Motor Company from selling their cars in certain parts of the world.

[Steve Eisman]

Right?

[John Gafford]

Yeah. Yet we import cars. We import.

[Steve Eisman]

Everybody. Everybody's free to come here.

[John Gafford]

Yeah. It makes no sense. Let's talk about the big short let's talk about that for a little bit. So let's go back in time. Obviously, that was. I lived through that. I've been in this business a long time. Las Vegas was ground zero for the financial crisis. And I have my good scenes in the movie.

[Steve Eisman]

In Vegas.

[John Gafford]

Yeah, yeah. Inaccurate scenes. I mean, literally every stripper in this town owned three houses. Just kind of how it was.

[Steve Eisman]

I wouldn't know anything about that.

[John Gafford]

Well, I have a question. Let's talk about the semantics of the movie first before we talk about the actual sit. So what is it like when you're sitting there and they're like, okay, Steve Carell's gonna play you? What's that like?

[Steve Eisman]

Well, it's actually a little bit more complicated than that and more amusing. So I think in the fall of 2014, Michael Lewis called me because the rights to his book were sold right after he published it, which is something like 2010. And then nothing happened. So he caused. So I figured that is never going to happen. So then in 2014, I think it was, like, October, he called me and he said that. That the movie was going to get made, and Adam McKay, who had been. Who was this writer, step brothers, et cetera, had written the script and was going to direct and was going to call me. And I go. I go, yeah, sure, Michael. Nice talking to you. And sure enough, a week later, I get a phone call from Madam McKay. And it was kind of a funny conversation. He says to me, you know, he's written the script. He's going to be in New York. He wanted to come have dinner with me. And I said, sure. And then he says. He said, you know, we're trying to cast it, and at this point, it's quite possible that Brad Pitt's going to play you. And I said, listen, let me just interject here. I said, the only thing that Brad Pitt and I have in common is really good hair. And that's it. And I do have very good hair, I have to say. But that. But that was all we had.

[John Gafford]

And there's a. And there's a chance your wife loves you both.

[Steve Eisman]

And there is a chance that my wife will leave me for the guy who's gonna play me. So then it turned out that he couldn't do it. He had scheduling conflict. He took a much smaller role in the movie, and Steve Carell played me, and I met him, like, twice. That was it.

[John Gafford]

That was that. So this. The scene in that movie, I think probably your character's most famous scene, and I think it was based On a real event is when Ryan Gosling's talking about you coming to Vegas to the Mortgage Bankers Convention and you raise your hand and ask a question.

[Steve Eisman]

Did that really happen?

[John Gafford]

Did that really. Well, walk us through the real scenario of what happened.

[Steve Eisman]

So a, that really happened. It was a little bit different in that the way the movie depicted it, it was like a massive meeting. And it was actually not a massive meeting. It was a medium sized meeting that was hosted by Option one, which back then was the subprime mortgage lender that was owned by H R Block. And I was sitting in the audience with my partner, Danny Moses. And the scene about where he goes, zero probability. I did that because I was that obnoxious and rude back then. And as soon as I say it, my phone rings and I look at it and it's my wife. And I turned it in and go, I got to take this, I got to get out of here. And I. And I picked up my wife and I walked out. And that, that is what happened. So I mean, by the way, Danny, Danny literally crawled like under the chair.

[John Gafford]

Oh, I can imagine he would have, I, I can imagine he would have when that was going on. Let's, let's talk about the moment in that moment when you saw that potentially happening. What did you see in the markets at the time that you thought this might become something and has there been any parallels since in the real estate market?

[Steve Eisman]

So let me go back a little bit because I have a very, very long history with the subprime mortgage industry. In fact, I was a sell side analyst at oppenheimer in the 90s. And I cover a whole bunch of different financial services companies. And one of the subsectors that I covered was generation one, I like to call it 1.0 subprime mortgages. You know, companies like, if you remember, like the Money Store. Remember Phil Rizzuto, for the Money?

[John Gafford]

Oh, sure, yeah.

[Steve Eisman]

So that was one of the companies that I covered. It was run by a guy who was the son of the founder, I think his name was Mark turtletau. And in 1998, for various, various very complicated reasons, most of the sector pretty much went bankrupt. And I lived that. And that was a very searing experience for me. And the irony was that across the hall for me was Henry Blodgett, who was a young analyst at Oppenheimer. And he was getting on the call talking about how the Internet was going to take over the world. And this is a direct quote, dynastic levels of wealth were going to be created. It's one of the greatest predictions in history.

[John Gafford]

Dynastic levels.

[Steve Eisman]

Dynastic levels of wealth were going.

[John Gafford]

He was right. From the Internet.

[Steve Eisman]

He said this in 1998. And so here's Henry Blodgett talking about dynastic levels of wealth. And I have a subsector that went to dust. So after I left Oppenheimer, I went to a hedge fund, and then in 2000, and I started at FrontPoint in 2004. But in 2002, Subprime Mortgage 2.0 went public. And the funny thing about Subprime Mortgage 2.0 was that it was run by the same CEOs who ran 1.0. They just changed the names. So as early as 2002, I said to myself, this is a. I've seen this play. It's a play in three. People don't change. It's a play in three acts. Act three is going to be a tragedy. I'm just going to be there when it happens. When that will be. I don't know. Now, what I didn't foresee in 2002, that the industry would literally be 10 times bigger in 2006 than it was in 1998. Yeah, I think in 2002, the subprime mortgage industry originated like 50 billion. And in 2006, it originated 500 billion.

[John Gafford]

Well, didn't Clinton also incentivize banks to do this through some policy that was made? Was it him that did that?

[Steve Eisman]

It doesn't ring a bell.

[John Gafford]

Okay.

[Steve Eisman]

They didn't need an incentive. They made tons of money without any government incentives.

[John Gafford]

Believe me, fair.

[Steve Eisman]

So I was waiting. When you're waiting for something to happen, you look for evidence that it will happen. And what I saw was that by the summer of 2006, we had access to Moody's securitization data. All the securitizations report all their credit data every single month. And by late spring, early summer 2006, it was very clear to us that there was something was wrong. That that delinquency levels and these new pools were going bad very, very rapidly. And that's when we started to investigate.

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[Steve Eisman]

Paid for by nhtsa, the shorting subprime paper. And there's that scene where Ryan Gosling shows up in our office. That happened.

[John Gafford]

That was with the Jenga Tower.

[Steve Eisman]

Yeah, all that stuff happened.

[John Gafford]

I mean it was a great way to definitely talk about what was going to happen there. Do you see any parallels between that time and the real estate market since I actually don't.

[Steve Eisman]

First thing I would say is I don't think a subprime mortgage has been made in the United States in 2008, at least not that I'm aware of. And the other thing that I would say is that after Dodd Frank was passed, a new position in the Fed was created called Vice Chair of Financial Supervision. And that's a fancy name for chief bank regulator of the United States. I mean it's a crazy thing to say that the United States never had a chief bank regulator until 2011. And that position was occupied by Fed Governor Daniel Tarullo, who's truly one of the unsung heroes of the last 15 years because he really did an amazing job. He de risked the banks, he de levered the banks. So you know, I worry about a lot of things. I don't worry about the health of the US financial system anymore.

[John Gafford]

You know the reason I asked that, it was kind of a loaded question. I figured you were going to say no because being in the business that we're in, in real estate, you know, you're constantly talking to people that are pocket pro. You know, I'm just waiting for the market to crash, but it's not going to happen again. Because I try to explain to people equity doesn't go to foreclosure, somebody steps in to take that. Yeah, somebody. Somebody comes in to save that deal way before it hits foreclosure. It just. Equity never goes to the steps and for some reason people still in the residential world can't buy that. And I don't get it. So let me ask you this. If you were somebody right now and again self serving for me, you're great understander of the markets, if would you hold off on buying anything right now or what would you do? I mean I'm talking about.

[Steve Eisman]

I can only tell you what I'm doing.

[John Gafford]

Okay, perfect.

[Steve Eisman]

I sold a few things that I didn't have great confidence in and I'm sitting on my hands. That's what I'm.

[John Gafford]

So, so where do you think all this cash is? Because there's a lot of investors doing the same thing. Are there just, are there just absolute war chests being built up by hedge funds?

[Steve Eisman]

Hedge funds. I Guarantee you have de risked and they're waiting. And so there's a lot of cash on the sidelines, but that cash is not going to get deployed until this clarity.

[John Gafford]

They're sure. All right, well, I want to ask about one more thing that has nothing to do with anything you might know about, but I just wonder if you have an opinion, which is this. Now in the last couple of weeks, it seems like Elon Musk and the Doge Department wants to take aim at our elected officials for how does somebody that makes a couple hundred thousand dollars a year become worth tens of millions of dollars?

[Steve Eisman]

It's a good question.

[John Gafford]

And is that something that you feel needs to be looked into? Where are you with politicians that somehow become overnight millionaires in the stock market and they're the best traders on the street?

[Steve Eisman]

Well, should I. Do I think it should be investigated? Sure. Any type of corruption should be investigated. Do I think that's going to move markets? I don't think that's going to move markets.

[John Gafford]

Now do you think that, what do you think? How much would our government change if we took the ability to trade out of our legislators hands?

[Steve Eisman]

I don't know. I honestly don't know. That's a good question. I've actually thought about it. I'll think about it. I'll get back to you.

[John Gafford]

See, this is the podcast that makes you think, Steve. That's what I'm trying to do. I'm going to think about that one, which is good. Let me ask you this, because with the rise of AI, I just talked to Ari Meisel not too long ago. We were talking about AI and I actually asked him if do you think maybe there's some thinking within the White House about bringing manufacturing back to this country where AI is replacing low level workers at just an alarming rate? Do you think they're trying to bring manufacturing back in anticipation of having sort of a job shortage?

[Steve Eisman]

I don't think so. I mean it certainly may give them more impetus. But I think Trump has been thinking about this for a very long time, way before there was AI.

[John Gafford]

So even in your industry, how is AI trading? How is AI changing what you guys do?

[Steve Eisman]

It helps research. It helps. I mean, the access to information, you know, you ask, you ask AI a question. If you want to find out certain information that was more difficult to research in the past, boom, you get an answer.

[John Gafford]

Now, is it making your job harder because the speed of information is so much faster there?

[Steve Eisman]

I would say no. I think I'm going to say something a little Radical information is overrated. Let me explain what I mean by that. You know, people think, you know, when they talk about what, what my partners and I did in 2007 and 2008, that somehow we had access to information that other people did not have. And that actually is not true. You know, the most important, the apps, I mean, there was a lot of different types of information. It was anecdotal information that we did a lot of. But the most important information out there was the securitization data that came out every single month. And all you had to do to get that information was pay Moody's about $15,000 a year. I think that's what we paid, whatever it was. But you know what? The entire fixed income world had that information.

[John Gafford]

They just didn't understand how to look at it.

[Steve Eisman]

No, no, they understood how to look, they understood how to look at it better than we did because they've been doing that for years. We just interpret it differently. You know, they had made money for so long in this paper that they came up with all these psychological excuses why, yeah, the data is bad, but it'll get better. And so my view is that information is important, but it's the interpretation of the information that's even more important.

[John Gafford]

Well, you know, it's funny because we were, I was just talking about this with somebody else where he were talking about how Wharton has become, which don't be wrong, I'm not a Wharton grab, but we're talking about how Wharton has become this school for great operators and more CEOs come out of Harvard than come out of, of of Wharton. And I said, why do you think that is? And they said, because I think Wharton's school of business is very linear thinking. It's very this, this must equal this. Whereas they felt that at Harvard it taught more open mindedness in a way to interpret the data. It's because they, this person was saying, there's, there's science in the numbers, there's, there's science in the math, but there's also got to be art and nuance to the interpretation, which is what makes big moves in the market, big moves in business. Is that something that you. Yeah. Is that something, is that something that you guys.

[Steve Eisman]

I've gotten great to say about the University of Pennsylvania because I went there, I got a lot of problems with the school.

[John Gafford]

I was, I was not aware. There was a war between you and the University of Pennsylvania. We started that question.

[Steve Eisman]

That's public knowledge.

[John Gafford]

I was not aware. Is it public knowledge?

[Steve Eisman]

That's Public information. Yeah.

[John Gafford]

All right. Well, chat DBT did not return that for us that you're war. So you might need to update your model to that. But. But now I'm going to go look it up. I'm going to go find it.

[Steve Eisman]

You should look it up.

[John Gafford]

I'm going to do that. Well, Steve, thanks so much. If they want to find you, if they want to connect more with you, how do they find you?

[Steve Eisman]

Just go to the eismanplaybook.com that's our podcast website. We'll have, we will soon have another website which will be broader. It'll be steveisman.com but it's not up yet.

[John Gafford]

Okay.

[Steve Eisman]

And I'll be dropping a podcast pretty much once a week.

[John Gafford]

Perfect. We look forward to listening to that. And let me ask you one more question before we go on.

[Steve Eisman]

Sure.

[John Gafford]

Because I think this is one of the biggest problems with the world right now and I want to know your process for this. How do you, how do you decide where you get your information? Because there's so much of it out there. How do you decide this person's qualified? Not qualified. This is a good source. That's a bad source.

[Steve Eisman]

I mean, I'll tell you what I read and then, and then I'll tell you who I focus on. I read the newspapers every single morning. You know, I come in, I turn on my Bloomberg and I look at the news and then what I do is I read a lot of sell side research. And what I have found over the years is that, and there are exceptions to this, but generally speaking, the boutique firms, you know, little firms that most people haven't heard of, you know, not the Goldman Sachs and Morgan Stanley's of the world, they're good analysts there too tend to produce research. It's a lot sometimes you could say unbiased, but I would say deeper dives into what's happening. And I tend to learn a lot more from those people.

[John Gafford]

Cool. All right, well, thanks so much. All right, guys. Man, I hope that helped you today. And you actually have some information when you're sitting around the dining table with your mother, who knows more about it than you do you have some quality information from the man that probably knows more than all of us. But remember, man, I think if anything else, be careful where you get your information because if you just start repeating something that's nonsense, it makes you look like nonsensical as well. We'll see you next week. What's up, everybody? Thanks for joining us for another episode of Escaping the Drift. Hope you got a bunch out of it. Or at least as much as I did out of it. Anyway, if you want to learn more about the show, you can always go over to Escaping. You can join our mailing list. But do me a favor, if you wouldn't mind, throw up that five star review, give us a share. Do something, man. We're here for you. Hopefully you'll be here for us. But anyway, in the meantime, we will see you at the next episode.