Podcast Summary: The Compound and Friends – "The Next Big Short is the Trade War"

Episode Information:

• Title: The Next Big Short is the Trade War
• Hosts: Downtown Josh Brown, Michael Batnick
• Special Guest: Steve Eisman
• Release Date: June 13, 2025

Introduction

In episode 196 of The Compound and Friends, hosts Downtown Josh Brown and Michael Batnick welcome renowned investor Steve Eisman, best known for his pivotal role in predicting the 2008 financial crisis—a narrative famously depicted in Michael Lewis's The Big Short. Eisman shares his insights on current economic trends, the potential impact of a trade war, and his perspectives on various financial sectors.

Reflecting on the 2008 Financial Crisis

Michael Batnick: “Steve, give you some credit for not becoming a perpetual bear after the financial crisis.” [09:10]

Steve Eisman: “2007 was fun because I was short all the subprime paper... It was a zero-sum bet.” [10:30]

• Key Points:
  • Eisman discusses his experience during the 2008 crisis, emphasizing his anticipation and shorting of subprime mortgages.
  • He highlights his disappointment in Wall Street's practices and their role in exacerbating the crisis.
  • Reflects on the lack of preparedness from government entities, noting a pivotal realization in the summer of 2008 that the Fed and Treasury were unaware of the crisis's depth.

Notable Quote: “Incentives trump ethics almost every time.” – Steve Eisman [19:53]

Current Economic Landscape: The Deficit Debate

Michael Batnick: “People confuse the federal deficit with household finances.” [32:08]

Steve Eisman: “I love the deficit. I want more of the deficit because we are the reserve currency of the world.” [27:35]

• Key Points:
  • Eisman dismisses long-standing fears about the federal deficit, arguing that as long as Treasuries remain the global reserve currency, concerns are overstated.
  • He likens the deficit debate to Wall Street’s virtue signaling, critiquing pundits who amplify deficit concerns without tangible outcomes.
  • Batnick counters by noting historical instances where deficits coincided with stock market bubbles, suggesting complex interdependencies.

Notable Quote: “Everybody in the chain, from the originators to Wall Street, they all got paid on volume.” – Steve Eisman [20:43]

The Impending Trade War: Risks and Implications

Michael Batnick: “The Next Big Short is the Trade War.” [Episode Title]

Steve Eisman: “If there's a trade war, there'll be a global recession, and it's binary.” [37:14]

• Key Points:
  • Eisman expresses concern that escalating tariffs between the US and China could trigger a global recession.
  • He compares the potential trade war fallout to the complexities that led to World War I, emphasizing the unpredictable nature of international negotiations.
  • Batnick introduces the concept of "sneakflation," where firms may discreetly implement price hikes to offset tariff-induced costs, spreading inflationary pressure across various sectors.

Notable Quote: “The only thing that will impact this is whether there's a trade war.” – Steve Eisman [37:14]

Private Credit and Financial Services Sector

Michael Batnick: “Private Credit is getting a lot of attention, especially from wealth managers.” [59:15]

Steve Eisman: “I have no data to have an opinion on private credit, but it's possible it could blow up.” [59:51]

• Key Points:
  • Discussion on the rise of private credit as a significant area within financial services, driven by regulatory changes post-Dodd-Frank.
  • Eisman remains skeptical due to the lack of transparency and data, drawing parallels to the subprime mortgage crisis.
  • Batnick highlights the risks associated with private credit funds, where average investors could be exposed to heightened risks without adequate oversight.

Notable Quote: “I just don't believe you're going to be able to disenfranchise fees.” – Steve Eisman [58:53]

Banking Sector Insights: Goldman Sachs and Morgan Stanley

Michael Batnick: “What do you think of Goldman's place in this new world?” [60:55]

Steve Eisman: “Goldman is back in terms of its business model... Morgan Stanley has a more durable business model and much more diversified.” [61:26]

• Key Points:
  • Eisman praises Goldman Sachs for returning to its core strengths in trading, M&A, and IPOs but advises against viewing it as a long-term investment.
  • He favors Morgan Stanley for its diversified business model and higher return on equity (ROE).
  • Discussion on regional banks and the potential need for mergers to enhance competitiveness amidst high regulatory and technological costs.

Notable Quote: “Emma says, I hate it more than him. He's nobody.” – Steve Eisman [28:42]

Technological Disruptions: Stablecoins and Fintech

Michael Batnick: “We learned there are alternatives to Treasuries with stablecoins.” [29:48]

Steve Eisman: “Circle is regulated and trustworthy, but how big can stablecoin really get?” [65:32]

• Key Points:
  • Exploration of stablecoins as potential disruptors to traditional payment systems, though Eisman remains cautious.
  • Discussion on Circle's stablecoin, highlighting regulatory compliance but questioning the scalability and real impact on entrenched systems like Visa and MasterCard.
  • Batnick introduces "sneakflation" and the role of stablecoins in remittances, while Eisman underscores the dominance of existing financial infrastructure.

Notable Quote: “How much could you possibly make with a trillion dollars in Circle? 4%.” – Steve Eisman [67:19]

Labor Market and Economic Resilience

Michael Batnick: “Unemployment claims are rising, making rehiring more challenging.” [37:06]

Steve Eisman: “The economy is incredibly resilient... unless there's a trade war.” [41:22]

• Key Points:
  • Batnick notes increasing unemployment claims and difficulties in rehiring post-pandemic.
  • Eisman attributes economic resilience to the absence of a trade war, suggesting that tariffs and trade tensions are the primary threats to sustained growth.
  • The hosts discuss the binary nature of potential outcomes: continued growth without a trade war or a global recession if one ensues.

Notable Quote: “If there's a trade war, we'll have a recession.” – Steve Eisman [37:14]

Conclusion and Final Thoughts

The episode wraps up with personal exchanges, highlighting Steve Eisman's anticipation for his daughter's upcoming wedding and casual conversations about comic book movies. The hosts encourage listeners to follow Steve's podcast, The Real Eisman Playbook, for more insights.

Final Notable Quotes:

• “I'm looking forward to the wedding.” – Steve Eisman [69:53]
• “I'm one of the world leading experts on comic books.” – Steve Eisman [72:43]

Key Takeaways:

• Trade War Risks: A potential US-China trade war poses significant risks, potentially triggering a global recession.
• Deficit Concerns: Eisman challenges traditional views on the federal deficit, emphasizing the centrality of Treasuries in the global financial system.
• Private Credit Skepticism: The rise of private credit warrants caution due to inherent risks and lack of transparency.
• Banking Sector Preferences: Goldman Sachs offers trading and IPO opportunities, while Morgan Stanley presents a more stable long-term investment.
• Stablecoins' Role: While stablecoins present innovative payment solutions, their substantial impact remains uncertain amidst existing financial infrastructures.
• Economic Resilience: The US economy shows resilience, but vulnerabilities remain primarily tied to international trade tensions.

Recommended Listening: For a deeper dive into Steve Eisman's investment philosophies and analyses, listen to his dedicated podcast, The Real Eisman Playbook.

Note: All opinions expressed are those of the speakers and do not constitute investment advice. Please consult with a financial advisor before making any investment decisions.